Capital Expenses
Capital Expenses are expenses relating to the purchase or maintenance of assets that are used for more than one year. Capital expenses tend to be large and they can be either planned, or unplanned. An example of planned capital expenses for a condominium might include a roof-repair, or a new treadmill for the gym. An unplanned capital expense might occur when the heating element in a heated swimming pool breaks and must be replaced. Paperclips, even if used for more than a year are not considered capital expenses because the dollar amount is too small.
Dealing with capital expenses, both planned and unplanned are part of the duties of the Board of Directors. An experienced Board of Directors can greatly minimize unplanned capital expenses. Consider the example of the broken heater swimming pool above: It is foreseeable that the swimming pool heater will break eventually. A competent board like the one at The Crossings condominium diligently keeps records, so we know when we installed the swimming pool heater. Also, we’ve hired expert property managers that are experienced in managing many condos in downtown Minneapolis; so using their wealth of experience, they can predict that our current pool heater is likely to break in the year 2021, and it is likely to cost $10,000 to replace. So, we enter the fact that we expect to have to pay $10,000 for a pool heater in 2021, into our 30 year-capital plan. Therefore, with careful planning, we have converted an unplanned capital expense into a planned capital expense that can be budgeted and saved for. Now:
- Repeat this process for every single asset and diligently record all of this in a spreadsheet.
- Re-evaluate it every year.
This is the process that The Crossings Condominium Board of Directors follows every year in conjunction with its professional management. If this process sounds exciting to you, consider running for a position on the Condominium Association Board.
Simply having a detailed capital plan like the one at The Crossings isn’t enough for prudent capital expense budgeting. The Board of Directors engages a professional engineering study every few years to conduct a thorough examination of the building. It is important to have the building evaluated by independent third-party experts to have our assumptions about required maintenance and replacement costs double-checked.
Once a capital plan has been created by the association’s professional management and double-checked by outside engineering firms, the Board uses its best judgement to adjust the capital plan. This is why having an experienced Board of Directors is vital to the health of the Condominium Association. For example in the year 2020, (line 7 of our capital plan) we have budgeted $2.8 million for an exterior renovation. We have good reason to believe that this renovation may not be necessary in 2020, in fact, it may never be necessary, but we won’t know until our outside engineers complete their assessment this summer. The board has decided to leave this large capital expense on our plan; however we have decided that we have enough time to adjust our budget after the engineering study gives us a more accurate picture of the time-frame and expense. Should this large expense be necessary, The Crossings condo’s significant reserves will reduce the size of a special assessment, should one be necessary. This careful planning benefits residents because it reduces the need for special assessments while planning for the future maintenance of the building.
Lastly, just having a great 30-year capital expense plan in place is not sufficient; a board must set dues at a level that is sufficient to cover the anticipated (and unanticipated) capital expenses in addition to the operating expenses. When a building has healthy reserves like The Crossings does, there will always be a temptation to reduce the dues and use money that is earmarked for tomorrow’s repairs to cover today’s expenses. A competent and experienced board like the board at The Crossings resists these temptations and other forms of short-termism that would threaten the association’s future.