North Carolina capital improvements: What to know

What are capital improvements?

Capital improvements are substantial projects that add, upgrade, or significantly improve community property, such as building a new clubhouse feature or replacing an outdated amenity with a major upgrade.
 

Common capital improvements in North Carolina

Capital improvements can take many forms depending on the size, needs, and goals of the community.

Examples may include:

• Building a new clubhouse or community center
   
• Adding a new swimming pool
   
• Constructing pickleball, tennis, or basketball courts where none previously existed
   
• Creating new walking trails or outdoor gathering spaces
   
• Adding a new playground or dog park
   
• Installing electric vehicle charging stations
   
• Adding a new gated entry or community access system
   
• Building new parking areas
   
• Adding permanent shade structures, pavilions, or other outdoor amenities
   
• Constructing new accessibility features that were not previously part of the property

How to fund capital improvements

Because these projects are typically significant, long-term investments, these are not inexpensive undertakings. Thankfully, there are several options to pay for them.

1. Dip into your reserve fund.

   Your community association’s reserve fund should be your first line of defense when it comes to funding repair and replacement of your existing assets. Unfortunately, up to 74% of associations have reserves that are “under-funded,” meaning they are not funded sufficiently to pay for the things they are supposed to cover when they reach the end of their useful lives.
   
   It’s important to confirm that your reserves are funded properly, or your association risks not being able to meet its obligations for maintenance of the community assets. North Carolina associations are responsible for maintaining, repairing, and replacing common areas and can collect assessments from owners to cover those costs (N.C. Gen. Stat. §§ 47F-3-107; 47C-3-107).
   
   Not maintaining the property is one of the most common causes of residents suing their association for breach of contract, for negligence, and even for injuries caused by improper maintenance. When planning your annual budget, first look at your reserve study to know how much should be deposited in your reserve fund, then check that your association’s HOA fees are sufficient to properly fund your reserve.
    

2. Implement a special assessment.

   If your reserves are insufficient that your association needs, you will need to look for alternate sources of funding. The most obvious, but least popular, way to fund a capital improvement is by levying a special assessment on the members of the association.
   
   The drawbacks and risks to this are immediately clear: angry homeowners will cause strife and dissent within the community and may even result in a lawsuit against the association for neglecting its fiduciary responsibilities. Another risk is the necessary funding may not come through in time if homeowners cannot afford the additional payment and require a payment plan.
   
   The only positive to a special assessment is the association isn’t assuming any debt. Before imposing a one-time special assessment on your community, it is critical to check your governing documents and consult with your association’s attorney.
    

3. Take out a loan.

   Borrowing money for capital projects has become common practice in the community association industry. Unlike a special assessment, a bank loan allows unit owners to pay for the construction project over a long period of time.
   
   There are three key benefits of using a loan to fund capital improvements:
    
   • First, some lenders offer association loans with no prepayment penalties for making additional principal payments or paying the loan off entirely. In some cases, the only time a prepayment penalty applies is if the loan is refinanced with another lender.
      
   • Second, most banks will lend up to 10 years, but increasingly banks are extending amortization to 15 or 20 years. This reduces the monthly payment and makes financing more affordable for unit owners.
      
   • Third, closing costs are often minimal for association loans. Since there is no physical collateral, the title and attorney fees can be much lower than if real property was involved.

Capital improvement tips for board members

Planning capital improvements for North Carolina HOAs goes more smoothly when boards take a practical, step-by-step approach.

• Start with the governing documents: Before the board commits to a project, confirm what the association is allowed to do and whether owner approval is required to support compliance with North Carolina property management laws.
   
• Understand the total cost: Look beyond the initial price tag and consider what the improvement may cost to maintain over time.
   
• Choose funding carefully: Compare the impact of using reserves, collecting a special assessment, or financing the project before deciding which option fits the community best.
   
• Compare vendors thoughtfully: Look for qualified contractors with relevant experience and a clear understanding of the project scope.
   
• Build in some flexibility: Major projects do not always go exactly as planned, so leave room in the budget and timeline for reasonable changes.
   
• Keep homeowners informed: Share the purpose of the project, expected cost, funding plan, and major updates so residents understand what is happening and why.
   
• Keep records: Document approvals, contracts, payments, and major decisions so the association has a clear project history.
   
• Think beyond completion: Consider how the improvement will affect future property maintenance needs and long-term budgeting once the work is finished.

How does that play out in the real world?

The Gibson, an 80-unit condominium located in the heart of Washington DC, was constructed in 1981. As could be expected with a building of this age, the glass and windows were due for replacement, and the association board was tasked with sourcing a loan to cover the expense. Not only would this project serve to fix issues with the existing windows and doors, but it would also protect and enhance the value of the owners’ investments in their units.

FirstService Financial, which provides best-in-class financial services for FirstService Residential-managed communities, was engaged to assist in the loan process. Ultimately, the association and financial institution were able to agree to a $1,500,000 loan and a 12-month non-revolving line of credit (draw period) followed by a 10-year term at 4.06%, fixed at closing.
 

About FirstService Residential

As North America’s leading property management company, FirstService Residential serves North Carolina communities with local expertise backed by national resources. Our teams support board members with meetings, recordkeeping, financial management, banking and insurance programs, resident communication, and 24/7 customer care. This way, board members can focus on long-term goals instead of day-to-day administration.

With over 20 years of experience across the state, we help HOAs, condo associations, high-rises, and master-planned communities operate smoothly and meet their goals with confidence. To learn how we can support your association, contact our North Carolina team today.

This information is provided for general informational purposes only and is not intended to constitute, and should not be relied upon as, legal, regulatory, financial, or operational advice, or as a representation or guarantee of any specific services, capabilities, or outcomes. Property management needs, regulatory requirements, market conditions, and available services vary by jurisdiction, property type, and community. FirstService Residential provides services through locally based affiliates and associates, and services and results may vary by community, region, contractual terms, and applicable law.