Contributed by Mike Ramsey
Reserve studies and funds have been receiving an increasing focus in community associations since the tragic collapse of Champlain Towers South in 2021. These multiyear plans anticipate and responsibly provide for ongoing preventive maintenance, periodic structural inspections, and the timely repair and replacement of community components such as roofs, sidewalks, lighting, air conditioning, and more.
For years, the Westberry Homeowners Association in McLean, Va., routinely parked its reserve funds in a simple bank account to cover repairs, maintenance, and replacement of its common areas and components. Board members broke with tradition this year — but not radically so.
After reviewing different types of secured investment vehicles, leaders agreed to put much of the community’s reserve funds into a certificate of deposit with a local bank, which offered an introductory interest rate of 4.5%.
A similar strategy has long been employed at Ford’s Colony Homeowners Association, a 2,600-home community in Williamsburg, Va. There, a finance committee of volunteers uses an investment policy to advise the board, says Assistant General Manager Sally Walls, PCAM. Community reserves totaling $2 million are “laddered” into a combination of CDs with different maturation dates and deposited in banks where lenders have offered competitive interest rates, she says.
The most important guardrail for investing a community association’s financial resources is to never stray from federally insured vehicles such as CDs and money market accounts, professionals say. Experts emphasize avoiding unsecured vehicles to potentially reap above-average yields. These high-risk items include stocks, futures, mutual funds, and real-estate investment trusts. Bonds issued by taxpayer-financed local governments also are considered risky. Perhaps the reddest cautionary flag is reserved for speculative cyber-based products such as nonfungible tokens and cryptocurrency.
“That’s beyond the pale and far too risky,” says Scott Weiss, partner and Tennessee office chair of Kaman & Cusimano in Nashville. “Whatever vehicles (boards) choose to pop that reserve fund money in, it needs to be liquid, and it needs to be very low risk.”
A fellow in CAI’s College of Community Association Lawyers, Weiss stresses that board members are legally obligated to act in the best interests of their community. Weiss recommends consulting with an attorney and a qualified, fee-based financial adviser before executing a transaction.
A carefully written investment policy should keep community associations on a straight and narrow path, say professionals who advise them.
South Riding Proprietary Association in Chantilly, Va., a community of 6,300 homes that invests millions of dollars to help maintain amenities such as parks, swimming pools, fishing piers, and nature trails, approved its policy more than 20 years ago. The document authorizes the board to invest reserve funds and operating funds not being used for immediate expenses. It recommends hiring a financial management agent and an investment manager to assist the board, and the policy defines the types of financial vehicles — CDs, money market accounts, and U.S. Treasury products — that may be used.
Conversely, the policy prohibits board members from investing in “commodities, options, futures, annuities, or partnerships,” says General Manager Kristi Felouzis, CMCA, AMS, PCAM.
The Federal Deposit Insurance Corp. is considered the gold standard for protecting an investor’s principal. However, the FDIC’s insurance limit is $250,000 per depositor, per institution. Community associations investing greater sums must take care to spread the money across multiple FDIC-backed institutions to protect their money.
One solution is to put money in a brokerage account, says Cat Carmichael, PCAM, CEO of Strategy 1 2 3 in Broomfield, Colo., which advises community association management companies. The investment advisers who run them “have relationships with banks all around the country. They can do a lot better than a board just trying to look at their local financial institutions and open CDs,” she says.
Investing money requires planning and flexibility so community associations can tap their money as needed for expenses. Boards typically opt for a combination of long-term and short-term investments that allow for fluidity.
Boards considering making investments to grow the community’s income should run the idea by members and keep them informed, recommends Weiss, the Nashville attorney.
According to Mike Fitzpatrick, treasurer of the Cobblestone Community Association in Urbandale, Iowa, disclosure was a key goal in recent years as his community explored ways to reap higher interest earnings.
“We’re very risk averse. We won’t be going too crazy,” he says. “As a board member, you’ve got the fiduciary responsibility to protect everybody’s money.”
Mike Ramsey is a Chicago-based freelance writer.
>>Learn more about reserve studies and funds in CAI’s new Reserve Studies and Funds: How and Why Community Associations Invest Their Assets.
>>Read more about safely investing and building reserve funds in “Slow and Steady” from Common Ground September/October 2024.