Betterment

What is a betterment?

A betterment refers to an improvement made to an asset that enhances its value. In real estate terms, betterments are improvements to a property or to surrounding infrastructure, such as roads or sewers, that boost the value of a property. In business, a betterment is a capital expenditure that improves the value of an asset or extends its useful lifespan.

Deeper definition

It is important to understand the difference between normal repair and maintenance on the one hand, and betterments on the other. Refinishing floors or fixing a plumbing problem is not considered betterments because they simply sustain the value of a home. Betterments add something new to a property that materially increases its value: building a new sunroom or expanding the size of the kitchen.

Infrastructure projects undertaken by a city or a state are called public betterments. Once again, repairing sidewalks or repaving roads are not public betterments but only normal maintenance. Building a new park or installing streetlights where there were none before would count as public betterments.

In some states and municipalities, the cost of public betterments is covered by additional property taxes. If a city would like to add new public parking facilities or build a new school, it can impose a one-time betterment assessment on home owners to fund the project. Typically betterment assessments cannot be deducted from income tax the way taxed for repair projects can be, such as repaving roads. Home owners capture the added value from betterments in the amount they increase the value of a home.

For businesses, a betterment counts as a capital expenditure to upgrade an asset or otherwise extend its useful life span. As with real estate, betterments are distinct from maintenance and repair costs. Adding new machines to a plant to boost its productive capacity would be a betterment, while repairs to the plant’s existing machines would be normal maintenance. Expenses from a betterment are allocated over the useful life of the betterment, rather than all at once in one reporting period for repairs.

Betterment example

For commercial real estate, betterments are most frequently paid for by tenants, and frequently are a bone of contention when a property is damaged by weather or fire, due to insurance adjustments. Tony owns a warehouse in New Jersey, valued at $1 million and rented out to a tenant in the concrete business. The tenant made $500,000 in improvements, including new lighting and improved gates on the yard in front of the building. When a hurricane severely damaged the building, Tony was very surprised to find that the loss settlement incurred a large coinsurance penalty. The insurance adjuster explained that the betterments had increased the value of the property beyond the value of the $1 million insurance policy, requiring coinsurance payments. Tony’s lawyer, Mink, did not write a lease that would take into consideration the betterments issue, and as a result Mink got wacked.

 

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