Capital Improvements Getting Financing and Board Approvals

Even if your condominium or homeowner's association (HOA) is a fortified castle atop a hill and surrounded by a moat, one day, someone will hit it with a really big rock, and thus it’s inevitable: work will be done, repairs will be made, the sun will set. But some projects are of greater consequence than others, and these are often referred to as “capital improvements.” 

The New York Department of Taxation and Finance defines a capital improvement as “any addition or alteration to real property that meets all three of the following conditions: It substantially adds to the value of the real property, or appreciably prolongs the useful life of the real property. It becomes part of the real property or is permanently affixed to the real property so that removal would cause material damage and it is intended to become permanent.”” In Chicago the definition is a bit more ambiguous, but it’s still a term derived from accounting that carries the same basic connotation, not to mention the same substance. These aren’t regular maintenance tasks, but significant endeavors that may involve a dialogue, vote, or even additional financial contributions from ownership on top of the regular monthly assessments and fees. It’s important for a board to plan from day one for these types of projects, lest it be caught unawares as the sky—or possibly the roof—comes falling down.

Legalese

As a capital improvement is mostly, again, an accounting term, there is no cut-and-dry statutory definition, according to William O. Chatt, a partner with the law firm of Chatt & Prince in Burr Ridge. Section 9(c) of the Illinois Condominium Property Act, which addresses this type of project, states that the board may consider a reserve study to one day fund said projects, but is not bound by funding levels recommended by the study. Therefore, an association has some wiggle room as to how it saves for the inevitable rainy day. But a board would be wise to play things rather safe.

To delve further, Chatt explains that “by the statute itself, a board is supposed to be funding reserves, with an eye toward capital improvements or the eventual reparation or replacement of an aging system. What the act does not implicitly state is what the amount in that reserve should be. It simply uses the term ‘reasonable.’ So that begs the question, what is ‘reasonable?’ And as attorneys, it’s our job to advise a board to do a reserve study.” This reserve study should aim to gauge the age, wear, and remaining shelf life of an existing element of the property, and thus determine what that ‘reasonable’ number should be.

“If someone does push me to quote a specific figure,” continues Chatt, “I refer them to HUD underwriting requirements for condo-based loans. HUD wants to know that 10% of collected assessments are being put aside for reserves. Now, an association by no means has to do that, but, coming from HUD, it’s persuasive.”

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