What are capital improvements, and how do they differ from HOA maintenance costs? Given that both terms deal with community assets, there seems to be some confusion between them. Knowing the difference between capital improvements and HOA maintenance is important — especially when allocating expenses in your annual budget. Here’s an in-depth explanation that will help solve the HOA Maintenance vs. Capital Improvement confusion.
HOA Maintenance vs. Capital Improvement: What Do These Terms Mean?
If you want to know the difference between capital improvements vs repairs and maintenance, it’s important to know the definition of each term.
What Is HOA Maintenance?
Maintenance costs are expenses for the regular repair or replacement of current assets. The purpose of preventive maintenance is to restore the asset’s original condition and/or operation to a specific standard that prevents any further deterioration. HOA maintenance protects assets so that they can reach their expected useful life (their intended lifespan). Thus, maintenance expenses are necessary so that you can get ROI on your assets.
What Is Capital Improvement?
Capital improvements are expenses that increase the overall value of your assets. Associations have capital improvement projects when they want to boost an asset’s condition beyond its original or current state. Capital improvements are also used to extend a component’s useful life by enhancing the quality of services. They can help reduce future operating costs for the HOA, as well. Upgrades to an existing asset also fall under capital improvements.
Now that you have a better understanding of the HOA maintenance and capital improvement definitions, it’s time to tackle the fees or expenses involved.
HOA Maintenance vs. Capital Improvement: What Are the Fees Included?
The next question you might have is, “What are capital improvement fees?” and “What are HOA maintenance fees?”
Residents pay HOA fees each month, and the fees cover both capital improvement and HOA maintenance fees. HOA maintenance fees are used to pay for electricity and other utility bills of common areas, maintenance and cleaning services, landscaping, and security, among others.
HOA maintenance falls under Repairs & Maintenance in the operating budget. Expenses are funded by your HOA’s operating fund. Meanwhile, capital improvement expenses are taken from the HOA reserve fund.
Your HOA’s reserve fund allocates money for large-scale projects such as capital improvements as well as unexpected repairs. Capital improvements are projects that usually cost $10,000 and higher and have a useful life of more than a year. Capital improvement accounting helps determine all necessary costs. A reserve study also helps determine how much should be collected from homeowners over a period of time.
HOA Maintenance vs. Capital Improvement: Examples
To further understand their difference, here are HOA maintenance and capital improvement examples for you to consider:
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
HOA Maintenance vs. Capital Improvements: How to Find the Balance
It’s important to find a balance between HOA maintenance and capital improvements. Both are essential to keep your community and its assets functioning smoothly and properly. Regular maintenance helps an asset reach its expected useful life or even prolong it. However, there will come a time when it will be too expensive to maintain an asset. HOAs can then consider capital improvement to replace that asset.
Matching HOA maintenance with capital improvement helps save the HOA money. By being diligent about routine maintenance and repairs, your assets can reach their expected useful lifespan. On the other hand, if you fail to keep up with regular maintenance, you may have to have to start capital improvement projects way ahead of schedule. This will be difficult if you do not have enough money in your reserve fund.
HOAs also have to prepare for another scenario where a simple maintenance repair turns into a capital improvement. For example, while repairing a roof, it is discovered that the leaky area is beyond repair and the entire roof needs to be replaced.
The traditional roof repair is a maintenance request but with the necessary roof replacement, it becomes a capital improvement project. The HOA has to decide at that moment to extend the useful life of the roof since roofs are essential to the well-being of the community.
How Should Communities Handle Unexpected Repair Issues?
There is no easy answer to this question. Each case should be analyzed independently to see what the best possible course of action is. Associations may consider the value of working with an HOA management company. Apart from management experience, they also have expertise in accounting and other financials.
An HOA manager will be able to set protocols on how particular issues will be resolved and where they should fall in the balance sheet. The key is to report each incident honestly so that there are not issues with taxation or audits in the coming tax year. Having an HOA manager can reduce a lot of stress on the community. With an outside expert, your HOA will have fewer errors and more efficient practices going forward.
A Clear Understanding of HOA Maintenance vs. Capital Improvement
After learning definitions, examples, and other aspects, you now have a better understanding of HOA maintenance vs. capital improvement. You can also see how complex these two terms are, especially when it comes to allocating expenses in your budget. Accounting is something that takes a great deal of work and expertise. If you are unsure about where and how to start, don’t hesitate to give us a call. We can provide the assistance you need to successfully navigate between HOA maintenance and capital improvements.
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