VALUING PROPERTY - IMPROVEMENTS - 8618.1

Improvements, betterments and additions are costs that add value to an existing capital asset/property. An improvement that meets the capitalization threshold in SAM section 8602 is required to meet the criteria of this section. The improvement should have an estimated useful life that is representative of the improvement’s longevity. The improvement should be closely associated with the underlying capital asset/property.

An improvement or betterment adds value to the existing asset. An addition is an extension of an existing structure (i.e., increase to useful space). Added value or increased space is achieved by either:

1. Extending the estimated useful life of the existing capital asset beyond its original estimated useful life.
2. Increasing the effectiveness or efficiency of an existing capital asset.
3. Substantially improving the quality of output or a reduction in previously assessed operating costs.

For example:

• A building has an estimated useful life of 40 years. A replacement of the HVAC system in year 25 is required. The new HVAC system has an estimated useful life of 25 years. As an integral part of the building, the estimated useful life of the building will be extended 10 years longer than its 40 years estimated useful life. Therefore, capitalization of the HVAC system is appropriate (i.e., extend useful life).
• Widening a state highway from two lanes to four lanes would significantly increase the effectiveness and efficiency of moving traffic. Therefore, capitalization of infrastructure costs is appropriate (i.e., an increase in the effectiveness and efficiency of an existing asset).
• A building has operating costs of $10,000 per month for electrical service. Solar panels are installed. The electrical service for one month is reduced to $500. A substantial reduction in operating costs has resulted. Therefore, capitalization of building improvements is appropriate (i.e., substantial reduction in previously assessed operating costs).

See SAM section 8618.2, Repairs and Maintenance, for non-capital costs.