State HOA Rules Vary, and Governing Documents Do Too
Some states place restrictions on boards’ ability to spend HOA funds to make capital improvements without owner consent. “In Florida, we don’t have a statue that limits expenditures for capital improvements, but governing documents frequently will,” says Dennis J. Eisinger, a partner at Eisinger, Brown, Lewis & Frankel PA in Hollywood, Fla., who represents more than 500 condo and HOA associations.
“If your documents don’t limit it, it’s likely to be a discretionary board decision, but near half the time, you’ll find restrictions,” Eisinger adds. “They might say, ‘If a capital improvement will cost more than X, it needs to be approved by a vote of homeowners.’ It’s usually $100,000 or 5 or 10 percent of the association’s budget. I had one governing document last week that said it was X dollars, but as increased by the consumer price index, which is a pain to calculate.”
However, there’s a twist under Florida law. “In the law for condos, but not in the HOA statute, if there’s a material alteration or improvement to the common areas, unless your documents provide otherwise, you need 75 percent owner approval of the alteration, unless your documents call for a lower vote,” explains Eisinger. “It has nothing to do with cost. Some improvements could even save the association money, like closing a restaurant or gym the association was subsidizing.”
Minnesota doesn’t govern spending on capital improvements by statute. “But many governing documents do impose restrictions on capital improvement expenses,” says Nancy Polomis, a partner at Hellmuth & Johnson PLLC in Edina, Minn., who advises associations. “They tend to be older communities, which to me is telling—that as we learned more about association governance, imposing those restrictions wasn’t a good idea. You can’t spend more than $5,000 on a capital expenditure without homeowner approval, and often it has to be at a meeting with a super quorum, which has horrific results. Boards may not get the approval to do something, but not being able to do it has a huge detrimental effect on the community.”
What’s a Capital Improvement at Your HOA?
Capital improvements aren’t defined in Minnesota. “I start at the base of: It’s usually the big stuff,” says Polomis. “But one question I ask is: Are you adding something new? Are you building a gazebo or expanding a parking lot as opposed to repairing or replacing something that was there with like kind and quality? If you’re building new or expanding a facility, it’s probably a capital improvement.
“But if you had cruddy siding and now there’s a new product, some people might say that’s an upgrade,” adds Polomis. “That’s where it gets gray. A new product may last longer and have lower maintenance costs on an ongoing basis. So is that an upgrade, or are we simply using materials that didn’t exist back when the project was built? I’d say that’s not a capital improvement.”
Florida’s standard on capital improvements is also a bit elusive. “From an American Institute of Certified Public Accountants standpoint, which I think would be the standard, a capital improvement or expenditure is generally defined as an improvement costing more than $10,000 and having an expected useful life of more than one year,” says Eisinger. “That’s the first criteria, for whatever that’s worth.”
But Florida courts have also weighed in. “It’s defined by case law as something that materially and perceptively alters the function, use, or appearance of a common area,” adds Eisinger. “What that means, anybody knows. But you know a capital improvement when you see it. Even painting the exterior of a building a different color is a material alteration. If you’re taking a green area and paving it for parking, that would be material, too.”
However, Florida associations have some room for argument over capital improvements. “The association has some wiggle room, and interpretations are allowed,” says Ben Solomon, an attorney and founder of the Association Law Group in Miami Beach, Fla., who advises more than 500 associations and also represents developers through his second law firm, Solomon & Furshman LLP.
“If a capital improvement relates to an insurance item, then it could be a repair, not an improvement,” adds Solomon. “And do all planned capital improvements have to total more than 5 percent of the annual budget, or is that rule per capital improvement? The law doesn’t specify. In those cases, I’d say to take the member vote. But in theory, if the roof is capital improvement, and another project is a separate capital improvement, the board may be able to do each without a vote, saying each is under 5 percent.”