Maintenance vs. Capital Improvement; Roads

Started by TerriS6 • 23 replies • 430 views

💬 Join us to post & get advice from 50,000 HOA & Condo leaders.

⚡ Takes 30 seconds

Already a member? Log in

TerriS6 (California)
Posts: 3,284

Posted:

One website says the following below. My question: is switching from a chip seal road surface to an asphalt road surface a capital improvement?

HOA Maintenance Examples

Purchasing new light bulbs to replace the ones that have burned out
Paying for clubhouse utility bills to keep the building operational
Pool cleaning and maintenance each week
Availing landscaping services every spring
Having your HVAC inspected, cleaned, and serviced annually

Capital Improvement Examples

Repainting community structures every 7-10 years
Constructing new amenities such as a new gazebo, playground, or basketball court
Repaving or resurfacing of roads
Energy-efficient upgrades such as solar panels, LED lighting, and tankless pool heaters
Converting a garden into a parking lot

KellyM3 (North Carolina)
Posts: 2,239

Posted:

I would consider pavement replacement as a capital expense. Such a job is rare and outside the normal expectations of monthly maintenance of HOA operations.

JeffT2 (Iowa)
Posts: 880

Posted:

One chat site says:
Yes, switching from a chip seal road surface to an asphalt road surface is considered a capital improvement. This is because it involves significant expenditure for the construction and enhancement of infrastructure, improving durability and usability. Capital improvements typically enhance the value of the property or extend its useful life.

Google labs says something similar.

GregoryT1
Posts: 315

Posted:

I agree it's a capitol improvement project.

Both road type projects are a big item. I consider depending how much road you have bigger it might be bigger than roofs. I don't know the cost.

Out in the country we use a petroleum product and then they drop the stones on it. Then the cars themselves driving on it is the flattener. Dumb but true. In the city they rip up the entire asphalt down to the sub structure and lay down the new one. Both are pretty invasive and big projects for both municipalities. Lived in a condo assn with private roads. We were always crack sealing it. Eventually we would be due to rip it out. I moved by then.

DeanJ
Posts: 1,786

Posted:

In my view. changing the surface material of a roadway that requires maintenance to a more durable material is not a capital improvement.

GregoryT1
Posts: 315

Posted:

hi,

I found this definition of capital improvement.

"Capital Improvement Definition. A capital improvement is a structural addition or alteration that increases the overall value of a property. It can also increase the useful life of a property by improving its quality or strength. Capital improvement can also adapt a property to new use through upgrades or modifications.

In an HOA, capital improvement projects help increase the property values of homes within the community, as well as enhance homeowners’ quality of life. Homeowners can also make capital improvements to improve their personal properties."

https://emspm.com/what-are-capital-improvements/

I think we will need to agree on a definition of capital improvement. Once that is established then we can figure out this project. Based on the definition above it looks like it's a captial improvement. A roof replacement if it is "like to like" potentially is not. However if newer technology is used that makes the roof life longer and less leaky then it might be considered.

DeanJ
Posts: 1,786

Posted:

If using a superior product to repair an existing feature of a common ares is a capitol improvement -

Can an HOA use better paint than existed on siding without owner approval?

Can an HOA opt for 30 year instead of 20 year shingles without owner approval?

How about a better grade of carpet?

None of these increase the value of the property and neither does changing a material used on a road. Why would any one want to argue about this and have a board use a product that is going to cost the owners more money over time?

GregoryT1
Posts: 315

Posted:

Terri,

Your question is it the basis due to IRS tax implications? I believe the IRS has a tax viewpoint and allowance for capitol improvements? Also it's very tricky. Your road project looks like a capitol improvement and are you chasing after some tax allowances?

GregoryT1
Posts: 315

Posted:

Here is another link

https://condomanagement.com/condo-association-maintenance-versus-capital-improvements/#:~:text=Capital%20improvements%20are%20typically%20considered,lot%2C%20or%20installing%20new%20elevators.

I am little bit surprised that poking around I thought capitol improvement was something new and potentially something better. Now it looks like if you have a major project even a like to like can be considered a capitol project and maybe capitol improvement. That doesn't make sense to me but maybe everyone is driving off of what the IRS definition is.

https://www.investopedia.com/terms/c/capitalimprovement.asp#:~:text=A%20capital%20improvement%20is%20a,distinguishing%20them%20from%20ordinary%20repairs.

It is almost at the viewpoint of what an accountant's opinion is.

TerriS6 (California)
Posts: 3,284

Posted:

Quote:

Posted By GregoryT1 on 09/24/2024 2:22 AM
Terri,

Your question is it the basis due to IRS tax implications? I believe the IRS has a tax viewpoint and allowance for capitol improvements? Also it's very tricky. Your road project looks like a capitol improvement and are you chasing after some tax allowances?

Thank you, Gregory. No, not IRS. Just considering which projects need a member vote. Our Declaration requires that capital improvements costing over 5% of the budget need a member vote. Maybe a bigger problem is our one and only "reserve study" was not based on a visual inspection of common area components. So there's no baseline.

LoriM15 (Florida)
Posts: 1,009

Posted:

We consider the road repavement a maintenance item and pay for it out of our reserve funds. It's a once every 20 years expense, but it's maintaining an asset we already have on our books, not buying something new.

DeanJ
Posts: 1,786

Posted:

I might agree a major repair of a building could be a capital improvement if the HOA failed to maintain a building and it was falling down.

GregoryT1
Posts: 315

Posted:

Hi Terri,

What is the history of the roads in your assn? Is it a brand new development and this is the first time the roads needed work? The cost differential between the chip seal and the asphalt will it trigger the 5% of the budget rule? If so you might want to consider the condo rules and the member votes. This allows them to make a decision since it ultimately they are paying for the additional cost. The history of the road and what was done in the past helps. Also what was done in the past for other triggers of more than 5%.

TerriS6 (California)
Posts: 3,284

Posted:

Quote:

Posted By GregoryT1 on 09/25/2024 2:49 AM
Hi Terri,

What is the history of the roads in your assn? Is it a brand new development and this is the first time the roads needed work? The cost differential between the chip seal and the asphalt will it trigger the 5% of the budget rule? If so you might want to consider the condo rules and the member votes. This allows them to make a decision since it ultimately they are paying for the additional cost. The history of the road and what was done in the past helps. Also what was done in the past for other triggers of more than 5%.

This is 40+ year old association of SFDs. Roads were gravel when lots were sold. There is a patchwork of various surfaces with various types of repair, mostly older asphalt. A few sections of recent asphalt pavement. Low traffic.

GregoryT1
Posts: 315

Posted:

hi Terri,

Others will have opinions.

My 2cent take on it is open to members to vote according to the docs. It looks like a capital improvement (I am sticking to the IRS definition). Also if it hits the 5% rule you mentioned. I think you were already down that path with your due diligence.

Instead of the patchwork of roads that you have today, maybe they will surprise everyone and vote for dirt roads and horse and buggy.

I hope the road project getting to the results is a smooth one. It never is.

TerriS6 (California)
Posts: 3,284

Posted:

Thanks. I prefer horse and buggy 😊

MarshallT (New York)
Posts: 414

Posted:

Yes! This is a big undertaking and will cost a lot more than day-to-day maintenance work.

DeanJ
Posts: 1,786

Posted:

Quote:

Posted By TerriS6 on 09/22/2024 7:23 AM
One website says the following below. My question: is switching from a chip seal road surface to an asphalt road surface a capital improvement?

HOA Maintenance Examples

Purchasing new light bulbs to replace the ones that have burned out
Paying for clubhouse utility bills to keep the building operational
Pool cleaning and maintenance each week
Availing landscaping services every spring
Having your HVAC inspected, cleaned, and serviced annually
Repaving or resurfacing of roads
Repainting community structures every 7-10 years

Capital Improvement Examples

Constructing new amenities such as a new gazebo, playground, or basketball court
Energy-efficient upgrades such as solar panels, LED lighting, and tankless pool heaters
Converting a garden into a parking lot

I reordered your list into the proper categories.

TerriS6 (California)
Posts: 3,284

Posted:

Now it's your list. I should have posted the link before but here it is. https://emspm.com/what-are-capital-improvements/

KerryL1 (California)
Posts: 14,550

Posted:

Poor article on this topic since the author seems to think that some reserve projects are "capital improvements, Just because they're expensive & long-term.. That's incorrect, any component list in an accurate reserve study that has an estimated life for repair, and/or replacement is NOT a capital improvement.

New things are. Immense upgrades are, i.e., changing composition roofs out for tile roofs. Here's my HOA's CC&rs.

CC&R: 2.10 CAPITAL IMPROVEMENT. The term “Capital Improvement” means any dis-
cretionary and new addition to the Common Area of a substantial improvement (costing greater
than 5% of the gross Association Budget) that did not previously exist within the Project.

CC&R: "4.3.7 Capital Improvements. Subject to the terms of this Declaration, the Board
may, on its own motion or acting on a petition signed by two-thirds (2/3) of the Owners, approve
the construction, installation or acquisition of a particular capital improvement to the Common
Area and/or the Association Property...'"

CC&R: "4.5.1 Limit on Capital Improvements. The Board shall not, without obtaining
the consent of the Members as set forth above, incur aggregate expenditures for capital improve-
ments to the Common Area or the Association Property in any fiscal year in excess of five percent
(5%) of the budgeted gross expenses of the Association for that fiscal year."

GregoryT1
Posts: 315

Posted:

hi Kerry,

Thanks for the info! I am checking my condo docs. Just for myself.

Then based on what you have I am thinking but not certain does the Stirling laws have that also? Then it comes down to the 5% rule on the cost.

Terri

Does your docs have the same thing?

I think everything points to the 5% cost. I have driven on both types of pavement and they are substantially different from each other. Also we need another piece of info. What replacement time range is for the two types of road surface?

Nice topic. This can be applied to any type of upgrade discussion.

TerriS6 (California)
Posts: 3,284

Posted:

Quote:

Posted By GregoryT1 on 09/27/2024 6:08 AM
hi Kerry,

Thanks for the info! I am checking my condo docs. Just for myself.

Then based on what you have I am thinking but not certain does the Stirling laws have that also? Then it comes down to the 5% rule on the cost.

Terri

Does your docs have the same thing?

I think everything points to the 5% cost. I have driven on both types of pavement and they are substantially different from each other. Also we need another piece of info. What replacement time range is for the two types of road surface?

Nice topic. This can be applied to any type of upgrade discussion.

The vast majority of recent references I've found, including IRS, define repaving as a capital improvement.

Our docs don't define capital improvements but say any capital improvement exceeding 5% of budget requires vote of members.

Chip seal is 7-10 years. Asphalt 20-30 yrs.

GregoryT1
Posts: 315

Posted:

hi,

Then folks will need to fact check me on this.

https://findhoalaw.com/capital-improvements/

The duration of time is significant between the two road types and if it meets the 5% rule all the membership etc review and voting kicks in. Based on this info. Unless folks have other Stirling laws that knocks this link out or the link is wrong.

TerriS6 (California)
Posts: 3,284

Posted:

"A substantial and discretionary upgrade to the association’s common area components or materials."

This criterion "generally understood" to be a capital improvement would describe a repaving project, especially considering there are newer types of asphalt that last longer like the rubber crumb additives.

🎯 You've read this entire discussion

Join the conversation with 50,000 HOA & Condo Leaders:

✓ Ask follow-up questions
✓ Share your experience
✓ Get expert advice
✓ Access 350,000 discussions

Create Free Account →

⚡ Takes 30 seconds

Already a member? Log in here