Capital Improvements: Planning and budgeting for high-rises

In the world of high-rise residential associations, adequate reserve funding is a critical component of effective financial planning. These projects, ranging from structural repairs to amenity upgrades, require careful planning, budgeting, and execution. In this article, we will go over the many factors that come with capital improvements in high-rises, including insights from industry experts and current operations and budgeting trends.
 

What are capital improvements?

Capital improvements involve significant repairs or replacements that increase the value of a component beyond its original or current state. These projects typically work to lower future operational costs, such as maintenance or utilities, or any other type of improvement that can enhance the overall quality of life for residents. Designed to last over a year, capital improvements often come with a price tag of more than $10,000.
 

Importance of capital planning

If you are in the process of setting your high-rise homeowners association’s (HOA) budget and planning for future expenses, it’s critical to account for all upcoming replacement projects, repairs, and renovations. If you are a board member, we know this can feel overwhelming, which is why working with an experienced property management team is essential for building a solid, long-term plan.

Community associations should prioritize identifying potential risks, including safety concerns and financial limitations in the future; this process may involve adhering to rules, regulations, and industry standards that could replace common areas like roofs, resurfacing pavement, and doing maintenance tasks such as painting. It's also essential to account for other items that require significant preventive maintenance or replacement investments.
 

How do capital improvements affect my association?

While capital improvement projects may not happen often, they are essential to maintaining both your property’s value and compliance with community standards. Investments like these play a key role in your association’s short, medium, and long-term financial health.

Before moving forward with any plans, we recommend that you check if the funds needed to complete the project successfully are there in the first place. You should start by reviewing your reserves and other funding options that your association has in place. Your reserve fund should serve as the main resource for replacing essential equipment. Ideally, your reserve study and assessments should be in sync and enable you to cover replacements like HVAC systems and pool pumps without needing loans or additional assessments. If your reserves still fall short, you should contact a group of experts.
 

Types of capital improvement projects

1. Structural Projects: These are essential for preserving the integrity and value of high-rise buildings. This may involve concrete and steel restorations, which should be assessed through periodic inspections.
    
   • The tragic collapse in Surfside, Florida, recently prompted significant regulatory changes in some jurisdictions, underscoring the critical importance of structural soundness.


2. Mechanical Systems: Every mechanical component of a high-rise building has a projected lifespan and specific inspection requirements. These components include fire protection sprinkler systems, emergency generators, boilers, chillers, elevators, cooling towers, and other HVAC systems.
    
   • Regular maintenance is very important in helping these systems achieve their maximum lifespan, and each should be evaluated for inclusion in the community's reserve study.

Funding capital improvements

Capital improvement projects can be funded in several ways, with ongoing contributions being the most practical and fair approach. To make sure funds are available when needed, you and your association should budget for these capital expenditures in their reserve study and use preventive maintenance plans as a roadmap.

Mark Hopkins, president of the Ontario market for FirstService Residential, emphasizes the importance of reserve planning:

"It's paramount for boards to remember that the reserve plan is not simply a savings plan; it's an action plan. Repair and replacement of the common elements of the condominium not only provide safety and longevity, but they can also significantly affect property value and resale value in the real estate market."

In our capital planning episode from our “insighters” series on expert property management advice, Andrew Lester, president of FirstService Financial, echoes this sentiment, stating:

"The reserve study is going to tell the board the size, the timing, and the cost of the projects, and it could last for anywhere from a decade or two or three decades into the future."

He adds:

"If you're looking at a project that is well down the road, you can start reserving for that on an annual basis as part of the budget."

Budget Constraints

Many boards face challenges in balancing the need for capital improvements with budget constraints. Hopkins observes,

"Many boards tend to overlook projects that have more of a long-term ROI and focus on projects with more immediate savings due to pressures of keeping budgets reasonable for their owners."

Best practices to consider

• Comprehensive planning: Create short, medium, and long-term capital improvement plans.
   
• Regular reserve study updates: You should conduct reserve study updates every three years to align with best practice recommendations.
   
• Proactive Maintenance: Try to implement a proactive preventive maintenance plan to reduce life cycle costs and enhance property values.
   
• Expert Consultation: We recommend you collaborate with association attorneys, CPAs, and reserve study providers to have adequate budgeting for all responsibilities.
   
• Technology Integration: Consider "futureproofing" when upgrading systems, especially in areas like security and access control.

How to communicate capital expenditures

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.
 

What’s next? Starting a capital project

Hopkins offers this key advice to high-rise community stakeholders:

"An annual plan that includes multi-year testing and supports the proposed budget would make future expenses predictable and justify the need for adequate budgeting. As systems age, repair and maintenance costs will inevitably rise."

He highlights the importance of board members stepping back from the perspective of a unit owner and focusing on their broader responsibility to the community.

"This can be a challenging, stressful and demanding volunteer role; however, they need to keep in mind that they are elected to serve their community as a whole," Hopkins adds.

As the high-rise management world evolves, being informed about budget trends and best practices is very important during the capital improvement planning phase, and with resources like our BENCHMARK: High-rise report and our expert guidance, we want high-rise communities can better navigate capital improvements with confidence.
 

BENCHMARK: High-rise

If you want to learn more about budgeting strategies for capital improvements in high-rises, we invite you to download our BENCHMARK: High-rise guide.

With data compiled from communities in our managed portfolio of 3,800 high-rise buildings across major urban areas across North America, BENCHMARK helps community association boards, developers, property managers, and owners of high-rise properties make informed decisions about their operations and budget strategies. contact a member of our team.

To learn how FirstService Residential can support your community's vision, contact a member of our team.