Repairs and Maintenance vs Capital Expenditure: What's the Difference?
It’s no secret that association management is a big job. Across Minnesota, common areas require routine maintenance to uphold community standards to – things like light bulb replacements, landscaping and paint touch-ups. Depending on your townhome community, the scale of your amenities' ongoing needs will vary.
But sometimes the projects are bigger, like landscape enhancements, siding and roof replacements, refurbishments, security upgrades and more.
Needless to say, this is a wide array of requirements and tasks. The one commonality? They all cost money. The difference? They can’t all come out of the same operating budget. That’s why your budget includes allocations for both “maintenance” and “capital expenditures.” We’ll explore the difference here.
But sometimes the projects are bigger, like landscape enhancements, siding and roof replacements, refurbishments, security upgrades and more.
Needless to say, this is a wide array of requirements and tasks. The one commonality? They all cost money. The difference? They can’t all come out of the same operating budget. That’s why your budget includes allocations for both “maintenance” and “capital expenditures.” We’ll explore the difference here.
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First, know the difference.
Put simply, whether you live in a suburban townhome or a townhome community in Minneapolis, your maintenance costs are routine, and they’ll appear in the Repairs and Maintenance (or R&M) portion of your budget. Further examples include replacement of dead grass, repairing your entrance monument, or replanting shrubs. In contrast, capital expenditures count as investments that actually enhance your asset’s market value. These examples might be exterior painting, resurfacing private roads and sidewalks, or installing a completely new entrance monument, just to name a few. The distinction between the two is important to townhome management and it’s essential to remember it when you’re creating and adhering to your ongoing budget.
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Maintenance work has a pretty specific definition.
Generally speaking, both routine and preventative maintenance are classified as such if they are performed to restore the asset’s physical condition and/or operation to a specified standard, prevent further deterioration, replace or substitute a component at the end of its “useful life,” serve as an immediate but temporary repair, or assess ongoing maintenance requirements.
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Capital expenditures/improvements fall under specific criteria, too.
Put simply, a capital improvement will enhance an asset’s condition to a state that is beyond its original condition. You’ll perform capital improvements when you want the asset to perform a required extension of its “useful life,” increase quality of service, diminish operating costs, or revamp essential components of the community.
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Sometimes, a maintenance job can turn into a capital improvement.
You’ve probably experienced this before. A leaky roof requires repair, but after the roofing company assesses the condition of the roof, they find that it’s beyond fixing and an entire replacement is called for. The initial repair would’ve counted as maintenance, but a new roof qualifies as a capital expenditure. It’s important to recognize the fluidity of the two categories.
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Know “useful life.”
This is a term specific to this area of operations. “Useful life” refers to its lifespan – the length of time that a system or piece of equipment is expected to serve its original purpose. This not only applies to your entire asset, but also to specific components of it, such as security, mechanical and electrical systems. Useful life is affected by wear and tear, technical or commercial obsolescence, environmental effects, and even changing regulations or laws. Just remember that “useful life” isn’t predetermined; you can extend it by performing enhancement or repair work. When this work happens, be sure to categorize it appropriately as “maintenance” or a “capital expenditure.”
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Take it case by case.
Categorization isn’t always as simple as it sounds. Review each instance on its own, and make your decision accordingly. It helps to consider the value of the asset, the goal of the work that’s being performed, the overall scope of work, and the result of the work. It’s also important to take into account the work’s impact on the asset’s value, depreciation, and equity return. An excellent association management company can help you with the distinction.
With practice, you’ll become better at appropriately categorizing repair work as either maintenance or a capital expenditure. The difference is important to your financial stability, so keep a close watch on all work from start to finish.