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 New Jersey, 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 unaware as the sky—or possibly the roof—comes falling down.

Legalese

While, as mentioned above, the term capital improvement applies more toward accounting than it does the law of the land, there is at least one case on the books that speaks directly toward this type of project, within a condominium or HOA setting. According to Robert Griffin, a partner with law firm of Griffin Alexander, PC with offices in Randolph, New Brunswick and New York City, said cases have established that capital improvements pertain to ‘new things.’ “The replacement of a roof, let’s say, is generally not considered a capital improvement, but a replacement of an existing improvement,” explains Griffin. “Now, if a property has aluminum siding from the 1960s, and the board opts to replace it with beautiful new vinyl siding with a marked uptick in the insulation factor, you may very well be making a capital improvement, as you’ve done something new.”

Once a project is defined as a capital improvement, it triggers an approval process that renders it more of an ordeal than a standard repair. This is due to the fact that most condominium documents require, at minimum, a two-thirds vote of ownership in order to move forward with a project of this magnitude. “That’s the average in New Jersey,” says Griffin. “But on the flip side of the coin, if you make a capital improvement you don’t have to pay sales tax. So you have to be pretty accurate when defining the work being done, as the state tax authority reserves the right to disagree with you. Is there some wiggle room? Probably. But I wouldn’t recommend stating that you’ve made a capital improvement just because you’ve replaced your shingles in kind and thus withhold paying sales tax. But nor would I say that you could be justifiably accused of having failed to take a vote of the unit owners. You have to be correct as to the project stated in your definitions.”

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