Capital improvements defined: What is a capital improvement?

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Capital improvements defined: what is a capital improvementWhen it comes to residential property management, various concepts must be taken into consideration. One notable feature of maintaining a residential community is the occasional capital improvement project. Make no mistake; this is not the same as your typical repair and maintenance (R&M), which can be further explained in our article Maintenance and Repairs vs. Capital Improvements – What’s the Difference?

How are capital improvements defined?

Capital improvements are major replacements or repairs that will increase a component’s market value beyond its original or current state. In general, it is intended to lower future operational costs (such as maintenance or utility costs) or enhance residents’ quality of life. These improvements are often designed to last more than a year and usually cost over $10,000.

What are examples of capital improvements?

Some examples of capital improvements can include:
  • modernizing elevator cabs
  • installing variable frequency drives on cooling tower motors
  • upgrading to energy-efficient lighting
  • any other significant value-adding improvements.
High, unexpected repair costs can also qualify as a capital improvement project. For instance, a roof has a leak, and a roofing company is called to repair it.  After an evaluation, the roofing experts determine that the leaky area is beyond repair and the entire roof needs to be replaced. While a roof repair would have been considered a maintenance expense, the necessary roof replacement has just become a capital expenditure.

How do capital improvement projects affect my association?

While these types of projects are not frequent, they play an essential role in the financial success of any association. Capital improvements are necessary to maintain your property’s value and keep up with community standards.

So before making any plans, make sure you have the funds to complete the project successfully. Begin by reviewing your reserves and other funding options. Your reserve fund should always be the starting point for the replacement of essential equipment. Hopefully, your reserve study and assessments have aligned so that you have the money on hand to replace things like HVAC equipment and pool pumps without needing to seek a loan or levy an assessment. If your reserves aren’t sufficient, your property management company and financial provider should help you identify possible funding sources.

If your association is not already doing so, you should start budgeting to fund future projects. By planning ahead, you can ensure that your association has the funds to complete these critical projects. To learn more about how to keep your community association financially healthy amid capital expenditures, read our article How Can My Association Fund an HOA Capital Improvement?

What are ways to communicate an upcoming capital expenditure to residents? 

Before investing time and money in a capital improvement project, take the time to survey owners and understand their wants, needs, and priorities. Even when it comes to replacing essential infrastructures such as elevators and gates, it’s important to gather resident feedback if there’s going to be a significant change to the design or function of the equipment. Emphasizing how the improvement will enhance residents’ lifestyles will make it more palatable, especially if there’s a big price tag attached.

Some ways for you to communicate a potential capital expenditure is to send out surveys to collect resident feedback, discuss it during community meetings and use all other communication channels available, such as emails or your association website. It's also wise to send out newsletters, so homeowners are aware of work that’s in progress, how it might impact them individually or as a community, and when it’s likely to be completed. This can help manage expectations and helps them feel like there’s an end in sight.

How can I anticipate a capital improvement project?

For the most part, your community’s major components (or assets) remaining useful life determines the timing of your capital improvement projects. In some cases, preventative maintenance plays a huge role in the longevity of your equipment. Proper preventive maintenance (or lack thereof) could extend or reduce the lifespan of assets.  Therefore, having a comprehensive, monitored preventive maintenance plan is important to any community.

If you have several components that are reaching the end of their useful life at once, it can be difficult to know when each should receive a replacement. The best way is often to evaluate how long each component will last before needing another upgrade and then plan accordingly.

If a professional property management company manages your community, ask about similar projects it has managed in other communities. An experienced management company with an extensive portfolio of properties (both local and national) will be able to provide examples at different budget levels.

What’s next? Starting a capital project

The next step after identifying your project is to plan how you're going to accomplish it. Who needs to be involved? What are some things that will need attention at each stage of the process? A few individuals who will be responsible for managing certain facets of the project are engineers, architects, project managers, onsite team members, and perhaps even politicians & community leaders. The roles and responsibilities will vary according to the project, budget, and time frame however, all of this must be considered to ensure no future complications along the way.

For further details on kickstarting your capital improvement project, watch the brief video below from Anthony Gragnano, vice president at FirstService Residential South.

The best way to know how capital improvements need to be defined and approved for your association is to check with your association’s governing documents, legal counsel, or accountant.

If you wish to learn more about how FirstService Residential can serve your community and provide industry insight, contact us today.
Thursday November 17, 2022