The Difference Between HOA Maintenance vs. Capital Improvement
There is a great deal of confusion with HOAs about how to properly allocate their various expenses in their accounting practices. The reason for this is that there are very strict regulations for HOAs to follow and many different misunderstandings about where to allocate each expense in the budget. One common area of confusion is the difference between HOA Maintenance vs. Capital Improvement.
Maintenance costs are expenses for routine repairs that keep your building’s assets in their original condition, which traditionally fall under Repairs & Maintenance in your operating budget. However, capital improvements are the improvements that you make to increase the overall value of your asset. Repairs & Maintenance is classified as an expense on your budget sheet and capital improvements improve the asset’s market value and benefit your community or association.
Allocate Actual Maintenance Expenses as Maintenance
A general rule to follow is that both routine and preventative maintenance are classified as if they are restoring the asset’s physical condition and/or operation to a specified standard to prevent any further deterioration. Maintenance is considered to protect the item so that it can live out its “useful life” to the community or building.
Allocate Your Capital Improvements Appropriately
Capital improvements are performed to boost an asset’s condition beyond its original or current state. Associations decide to complete capital improvements when they want to increase an asset’s useful function or capacity. Capital improvements are also used to extend an item’s “useful life” by enhancing the quality of services or to reduce future potential operating costs for the HOA. An upgrade to an existing asset is also covered under capital improvements. Some examples can include investing in energy-efficient lighting or purchasing more modern elevators.
Balance Maintenance Repairs Converting to Capital Improvements by Understanding the Concept of “Useful Life”
HOAs have to be prepared for another scenario where a simple repair turns into a capital improvement. The most common example is that a roof is repaired and then it is discovered that the leaky area is beyond repair and the entire roof needs to be replaced. Typically, the traditional roof repair would be classified as a maintenance request, but now the necessary roof replacement has to be converted into a capital improvement. The HOA has to decide at that moment to extend the “useful life” of the roof since roofs are an absolute requirement of residents. “Useful life” is essentially the intended lifespan that they item is supposed to possess. Depending on the product, this number will vary, and it is up to the HOA to decide what scenario warrants a capital improvement and which scenario is only a standard maintenance repair.
How Should Communities Handle Unexpected Repair Issues?
There is no easy answer to this for HOAs. Each of these cases should be analyzed independently to see what the best possible course of action is. Usually, an HOA should consider the value of having an outside manager with expertise in accounting oversee their management practices. The reason for this is that the individual will be able to set a protocol in place for how these particular issues are resolved and where they should ideally fall on the balance sheet. The key is to report each incident honestly so that there are no issues with taxation or audits in the coming tax year. Outsourcing this practice could be a major reduction of stress for your community’s HOA members. Accounting is something that takes a great deal of work and expertise. Through using an outside expert, your HOAs accounting will have fewer errors and more efficient practices going forward.
How Clark Simson Miller Can Help
Clark Simson Miller has extensive experience in helping plan out HOA Maintenance vs. Capital Improvements in communities all over the United States. To learn more about how Clark Simson Miller can help your HOA, contact us online or give us a call at (865) 315-7505.