It’s hard—if not impossible—to plan a budget for your association and stick to it, especially if maintenance problems and structural crises are constantly taking you by surprise and depleting your community’s bank account. Capital budgets are the long-term budgets that improve conditions in buildings and surrounding grounds, and because the expenditures are infrequent and unfamiliar, they require a different kind of planning than regular operating budgets.
Capital vs. Operating
When boards make plans for the long-term financial health of their community, they have two different budgets for the upkeep of the physical structure: operating expenses and capital expenses.
Operating expenses are foreseeable, regularly recurring costs that administrators can plan for. Something like heat, which is an operating or maintenance expense, obviously must be supplied and resupplied throughout the year. HOA staff salaries must be paid on a regular schedule, and lawn care must be maintained week-to-week. Those are some typical operating expenses.
Replacing the roof, on the other hand, is a capital expense—something that only needs attention every several years. “Capital improvements are things that are going to have a value beyond the current period,” says Richard Montanye, CPA, a partner with Marin & Montanye LLP, in Uniondale, New York, “say a roof, sod work, new boiler, elevator repair…. that kind of thing.”
“Anything that would not be considered regular maintenance is a capital expense,” adds Martin L. Hopkins of Hopkins Investment Management, LLC in Princeton. “They are also typically large projects. The board for which I was treasurer had both a capital reserve and a deferred maintenance account. The deferred maintenance account was used for items such as repainting. The capital reserve account was used for large projects like roof replacement and redoing road surfaces.”