When homeowners purchase a home within a homeowners association (HOA), they submit to paying certain fees and assessments. One of the least understood is the capital preservation fee. Though usually just a one-time cost, this fee can often be quite pricey, and may give some homeowners a sense of sticker shock.
It’s critical for Board members to understand the nature of this fee, and to adequately convey its importance to owners and potential owners alike. With specific questions about how these fees operate, contact your property management company. If you live in the Carolinas, consider reaching out to Kuester Management Group, a top provider of HOA management in Huntersville NC, Charlotte NC, Myrtle Beach SC, and HOA Management in Fort Mill SC.
What is a Capital Preservation Fee?
The capital preservation fee goes by many names. In some HOAs, it may be known as:
- A Capital Contribution
- A New Owner Fee
- A Transfer Fee
- A Working Contribution Fee
As some of these names suggest, this is typically a one-time fee that owners pay when they buy into a new HOA. It may also be something that all owners must pay when the HOA transfers from developer to Board control. Note that, according to some HOA governing documents, new buyers must pay the capital preservation fee as part of their closing cost, which might make it a tiny bit harder for owners to sell their property.
What are Reserve Funds?
Generally speaking, the purpose of the capital preservation fee is to help maintain shared properties within the HOA, and to provide a safeguard for any major capital expenses that are coming down the road. To that end, the money generated from a capital preservation fee often goes directly to the HOA reserve fund. Reserve funds exist beyond the normal operating budget, signifying money set aside for major repairs, maintenance, or expansions to HOA property.
So what’s in it for the homeowner? On the one hand, owners get more equity in the community itself. Additionally, they are making an important investment in the long-term upkeep of shared properties, which translates into better property values for everyone in the community.
HOA reserves are funded partly through capital preservation fees, but special assessments may also be levied as needed.
Managing HOA Reserves: Tips for the HOA Board
For the HOA Board, there are a handful of steps to consider for properly regulating finances and managing capital contributions. Here are a few words of advice.
- Monitor the HOA’s financial health. Board members have a responsibility to understand the financial position of the association, including its income and expenses, along with debts or liabilities. This understanding helps the Board assess risks and take proactive steps to keep the community in a healthy place.
- Have a clear, long-term financial plan. Proper planning ensures that the HOA has the resources it needs to maintain the common areas and facilities over the long term. Think about monthly expenses, emergency needs, and the income generated by your Association.
- Invest in the upkeep of common areas. Properly maintaining the common areas of the community can help to preserve the value of the association’s assets. Hold regular inspections, make repairs as needed, and have a schedule for preventative maintenance.
- Guard against risk. Put clear policies and procedures in place to manage the HOA’s assets, including both property and monetary assets. We recommend developing well-defined rules for the use of common areas, as well as policies related to financial management, insurance, and risk management.
- Communicate. Finally, make sure you are clearly and consistently communicating with your members about the HOA’s financial health. Keep everyone in the loop so that, if you do need a special assessment, it doesn’t catch your owners off guard.
Frequently Asked Questions
Who pays capital improvement fees?
Generally speaking, capital improvement fees are covered by the homeowners who live within the HOA.
Are HOA capital contributions deductible?
Capital contributions are not tax deductible, but they can increase the cost basis of your home.
What is the difference between repairs and capital improvements?
Repairs tend to be more minor in scope, while capital improvements involve refurbishing or extending the life of an asset for a while to come.
Do capital contributions get paid back?
Generally speaking, capital contributions are not repayable.
What is a capital contribution at closing?
The specific amount can vary depending on the HOA, but be prepared for it to be a few thousand dollars, give or take.