Q: Our condominium board of directors has voted to spend more than $150,000 for work on the lobby, the roof and the elevator system. Many of us believe that the owners, or at least a majority of us, should have to approve these expenditures. However, the board has determined that this work is "maintenance and repair" and that no such approval is required. What can we do?
A: With any discussion of board authority, one has to look to what we lawyers call the "power source." In any community association, there is a hierarchy of laws. First, with top priority, is your state statute. Maryland, Virginia and the District all have condominium acts.
In many situations, however, the law may not give guidance on the issue of board authority. In that case, you have to look next to the condominium declaration. If relevant information is not found there, the next level of priority is the bylaws of the association. Finally, the rules and regulations will apply, to the extent that they are not in conflict with the higher levels of authority.
Most association documents give the board the authority to spend whatever money is required for the "maintenance and repair" of the condominium's property. This authority is usually found in the bylaws.
However, many association documents also state that "additions, improvements and alterations" must be approved by a majority of the membership. In some associations there is a dollar cap on the amount of money the board can spend for any purpose. To exceed that, a majority of the unit owners must give their consent.
But what is "maintenance" and "repair" and what is an "improvement?" This dilemma is not unique to community associations. In the tax arena, there are hundreds of cases that raise the question of how to define these terms. Unfortunately, the findings in many of the cases are contradictory.
The Internal Revenue Service has issued regulations that attempt to define what a repair is. By analogy, you might use IRS criteria to determine whether your board is genuinely engaged in repair and maintenance or is considering improvements that might warrant a vote by unit owners.
According to the IRS, there is a three-factor test to determine whether an expense is a repair:
* It is incidental.
* It does not materially add to the property's value or appreciably prolong its useful life.
* It is incurred to keep property in ordinarily efficient operating condition.
Obviously, this is a very broad definition. As a result, there have been numerous court cases attempting to come up with more precise definitions.
A repair differs from a capital improvement. Generally speaking, if the work you are doing to your investment property has a useful life of more than one year and adds value to your property, the IRS would call it a "capital expense."
By and large, the determination rests on the situation.
Here are some illustrations:
* Building repairs. If you paint the interior or exterior of your property, or plaster and paper the walls, the IRS will treat this as a repair.
* Roofs. If you merely repair your roof, this is a repair. However, if the work involves resurfacing or installing a new covering, the cost will usually have to be capitalized. But there have been some court rulings that have held that even if the work goes beyond a simple repair, the cost remains deductible as a "repair" based on the facts and circumstances of the situation. Deductibility is not what you as a condo owner are concerned with as regards your board, but the variability of even IRS rulings shows how these things are subject to interpretation.
* Compliance with governmental and regulatory requirements. If you are required by a governmental agency to bring your property up to building code standards, the work you do has generally been held to be capital in nature. For example, if you have to add a firewall or install an electrical system, this will be treated as a capital expense and not a repair.
Clearly, your board of directors should not be obligated to obtain a tax attorney's opinion each time it plans to spend money. There is, however, a common-sense approach to this. First, the board must be completely familiar with the association's bylaws. If the bylaws require a membership vote for expenditures over a certain dollar amount, call a special meeting and try to get that vote.
If the bylaws allow the board to spend money for repairs--and if all that the board will be doing is making repairs--the board can go ahead and contract for the work. However, if any improvements are being considered--such as upgrading lobby furniture or installing a better-quality roof--the board would be well advised to seek membership approval.
At the very least, the board should give notice of its plans to the unit owners. This way, if there are any objections raised, the board can consider whether to call for a membership vote.
If there is any doubt about whether a particular task is an improvement or merely a repair, it is better to let the unit owners make the decision--or at least give the board their opinions.
I am not suggesting that boards should shirk their responsibilities. Boards are elected by the owners, and boards have the obligation to manage and operate the condominium. However, boards also should remember that they have been elected by the owners, and that the money they are spending belongs to those owners.
Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address.