Managing HOA Reserves

 

Plainly, your association can earn income on its reserves. But it’s hard to know how to invest your reserves to generate that income. Your governing documents may include a section outlining a reserve investment philosophy, but that’s often filled with vague pronouncements, and not all CC&Rs include one. If yours doesn’t, contact a community association management company or an accountant or attorney who specializes in association work for advice on drafting a philosophy. Your intent should be to inform association members of your general goals and give shape to your decision making.

Your Duty as an HOA Leader

Be sure to understand your fiduciary duty to safeguard association assets. You must exercise reasonableness and care in decision making and give your loyalty to the association (you must act not for your own benefit but for the benefit of the association). To meet your fiduciary duties, carefully consider all options before investing your HOA reserves, and be sure your final decision is reasonable. Reasonableness is a squishy term in the law, but always ask yourself: Have I done the necessary homework? If so, given all the information I have, would a reasonable person make the same decision?

Most responsible boards interpret their fiduciary responsibilities to mean that they must limit their investments to those that will allow their reserves to grow but not jeopardize the principal amount. The most common investment vehicles for reserve funds are the boring stand-bys that allow principal safety, some growth, and reasonable liquidity, such as savings accounts and certificates of deposit. If you chose those routes, remember that the Federal Deposit Insurance Corp., which insures deposits in U.S. banks, limits coverage to $100,000. If your association’s reserves are higher, look for a bank that provides additional depositor insurance. You may have to trade a little lower return for the benefit of additional security, but that’s probably a reasonable decision.

Your Personal Risk with Aggressive Investing

Some HOA boards place their funds in riskier investments, but that carries its own dangers. Without explicit disclosure and formal consent from association members, you could face anger and lawsuits if your reserves drop. Even if you get members’ consent, you’ll still likely face claims that the risks weren’t adequately explained. All in all, risky investments are the surest way to invite trouble.

Your duty of loyalty requires that you have no conflicts that could cloud your judgment. For instance, if a local banker attempts to woo your association by offering you or other board members a discounted rate on a personal transaction—such as a mortgage or car loan—you have divided loyalties even if the lender is offering a market rate on your reserve account. If you think that disclosing the arrangement will head off complaints, think again. It will only generate questions and ill will about why discounted rates aren’t offered to all association members, rather than a select few.

You don’t have to go it alone in managing your reserves, and if you have exceptionally large reserves, you probably shouldn’t. You can find an investment advisor to help you manage the funds, but your fiduciary responsibilities still require you to keep close oversight over the advisor’s actions.