In recent years, reserve planning has become a long
overdue reality for many older homeowner associations.
The boom and bust mentality of deferred maintenance
and special assessments has finally been replaced with
proper long range planning and funding. For all of
them, that meant accumulation of hundreds of thousands
of dollars and for some, millions.
With the reserve fund growth comes the need for better
reserve fund management (also known as good
stewardship). With wise stewardship, member
contributions are substantially reduced due to the
miracle of compound interest. With properly applied
investment principles, even a modest condominium of 50
units can generate several hundred thousand dollars in
interest earnings over a 30 year projection period.
This means that the members will need to contribute
that much less out of their pockets. Good news indeed.
The board of directors has a fiduciary responsibility
to make sure reserve funds are invested properly and
safely. The board should not invest in anything that a
prudent person would consider risky unless there is a
broad consensus among the members that doing so is
okay (better get that in writing). The investment
strategy should also ensure that funds are available
To refine and define the HOA's reserve obligations, a
written Reserves Funding & Investment Policy is
extremely important. That policy holds both current
and future boards to a standard of accountability and
helps prevent the Board from using reserves like a
private piggy bank.
A good Reserve Plan puts the funding issue in proper
perspective. While, say, $50,000 or more may seem to
be a lot of money to an individual, it's a pittance to
an HOA when it comes to paying for major repairs and
replacements like roofing, painting, siding and
paving. Most reserve plans call for the accumulation
of hundreds of thousands or millions of dollars. Even
though the fund size seem large, it is rarely greater
than what is necessary to cover real costs. To stay
accurate, the Reserve Study must be updated annually
to ensure that the HOA is on track and being
When the Reserve Study is funded properly, more money
will result (Oh Joy!) but with that money comes the
responsibility to invest it wisely. A Reserve Funding
& Investment Policy will provide the philosophy but
it's up to the Board to see that the philosophy is
implemented. The larger the fund, the greater the need
for investment expertise. While your banker will
doubtless have some convenient options, that
convenience may be very costly since it can come with
a below market rate of return.
A trained investments consultant can be hired to
manage the reserve funds and maximize yields through
safe and insured investments. If your reserve funds
are substantial, this is a wise and profitable move.
The added investment return will more than pay for the
cost of the consultant.
Investment yield is directly related to the size of
fund being invested. The more you have, the greater
the yield. However, some banks don't willingly offer
their customers the better rates. As a matter of fact,
your bank may not be the best place to invest
reserves. For the best rates, you need to go shopping.
Next stop, the internet. Bankrate.com is one of
several online sources for local investment
You can search by state and city to locate higher CD
rates right in your locale.
Fiduciary responsibility requires that directors
handle reserves responsibility. When it comes to
investing there are three considerations: safety,
liquidity and yield.
Safety can be broken down into two categories: safety
of income and safety of principal. Safety of income
measures the likelihood that anticipated income from
an investment will continue to be paid in the amount
expected and at the time expected. Safety of principal
refers to whether the principal value of the
investment available at the outset will be available
at maturity. Both categories of safety can vary in
degree with specific investments.
Liquidity refers to investments that can be converted
quickly into cash. Homeowner associations need a
certain amount of liquid funds because major repairs
can happen unexpectedly. However, with a proper
Reserve Study, most repair events can be accurately
predicted years in advance. If the repair schedule
indicates 95 percent of reserves won't be needed for
three years, those funds can be obligated for at least
two years with little fear of being caught short.
Yield is simply the return received on the investment.
Generally, the longer the maturity period, the higher
the yield. So, a three year CD yields more than a one
year CD. Also, the safer the investment, the lower the
A well planned reserves investment policy factors
safety, liquidity and yield into the mix. These are
the basics of good stewardship. When the reserves are
funded according to a 100 percent funding philosophy
coupled with these basics, the HOA will find a firm
financial foundation for the future.