Investment of HOA Funds

Started by RichardC • 7 replies • 2903 views

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RichardC (Georgia)
Posts: 3

Posted:

I have my opinions on this, but am interested in the consensus of others:

In a situation where the Association's governing documents do not specify how Association Funds should be invested, does the Board have complete freedom (from liability) to invest in any fashion they wish?

Or, are there general principals of law that would constrain a Board to only invest in instruments that protect (insure) against loss of principal?

(Our HOA is located in Colorado)

RogerB (Colorado)
Posts: 5,067

Posted:

RichardC, effective 1/1/06 Colorado statute 38-33.3-209.5 requires Common Interest Ownership Associations to have written Rules and Regulations (also refered to as Policies and Procedures) on Investment of Reserve Funds. You can request a copy from your Board or managing agent.

Following is an example we drafted for Associations.

Roger B
--------------------------------------------------------
Rules and Regulations on Investment of Reserve Funds

A Reserve fund is maintained to provide adequate funds for future capital investments, such as fencing, landscaping, irrigation, monuments, signs, and contingencies. Reserve funds shall be invested in an account, or accounts, which shall be separate from the annual operating account, in accordance with IRS regulations. Reserve funds shall be invested at the discretion of the Board of Directors who shall consider safety of principle as the highest priority, followed by liquidity of funds, and lastly yield. Within these guidelines all funds shall be managed to maximize yield. A 20 year reserve plan shall be maintained to assist in establishing the amount of reserve funds required. The 20 year reserve plan shall be updated every three years and in any year that a major reserve expense occurs.

The reserve funds and the operating funds needed shall be used each year to determine the Annual budget. Annual disclosure on the reserve funds and the operating funds shall be made to all homeowners.

RichardC (Georgia)
Posts: 3

Posted:

Bob, Your comments are always appreciated. As it happens, I am on the Board of our HOA and I feel the same way. Our responsibility, as fiduciaries, is to use the Association funds to (1)pay expenses, and (2) provide a reserve for future contingencies. While maximizing a rate of return on deposits is desirable, like you, I don't feel that it is the #1 priority - - which should be to safeguard the security of the funds (the principal). Liquidity, yes, comes next, and finally, obtaining a reasonable rate of return. While I feel that our particular funds are reasonably safe, being in a investment company money fund - - I am at odds with our Treasurer over whether they are truly safe, i.e. - insured in some form against loss of principal. He seems to feel that I am insisting on investing only in FDIC-insured funds (which I am not) and has not responded to requests for documentation on how the company (a Big Name one)offers security of principal for the fund in which we are invested. Thanks again for your response.

THindman (Colorado)
Posts: 5

Posted:

This posting is in response to RogerB's posting dated February 6, 2006 concerning the investment of reserve funds by associations. Roger is correct that one of the policies and procedures required by SB100 is a policy regarding the investment of reserve funds. However, Roger seems to imply that there are no specific standards to be used in investing reserve funds and such decisions are purely discretionary on the part of the Board of Directors. Board members investing association funds, however, must comply with the standard of care set forth in the Uniform Management of Institutional Funds Act ("UMIFA") (codified in Colorado at CRS 15-1-1101, et. seq.) and the Uniform Prudent Investor Act ("UPIA") (codified in Colorado at CRS 15-1.1-102, et. seq.)

Also, Roger implies that the safety of the principle should be the highest priority in the investment of reserve funds, followed by liquidity, and then yield. However, these priorities may vary for different associations depending on each association's specific situation. For example, if an association's only anticipated reserve expense is not scheduled for many years in the future, the yield on investments may be more important to that association than liquidity.

Thomas J. Hindman, Esq.
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DavidH3 (Florida)
Posts: 5

Posted:

are their any rules governing investment of reserves in Florida. I have reviewed the laws and do not find any specifics. Although i am new to our HOA Board, as a compliance officer of a brokerage firm I am extremely familiar with fiduciary responsibilities and suitability of investments. We have all our funds currently in various FDIC insured products (CDs, Bank MMkts) and the returns are ok at best. I would be very comfortable investing money in a high quality Mutual Fund Governement Money Market Fund (vanguard, dreyfus). The yields are comparable to 3 months CDs, with liquidity. The underlying securities would all be backed by the full faith and credit of the US Governement...BUT they are not FDIC insured which is a stigma for many people. Any experience on this matter?

RogerB (Colorado)
Posts: 5,067

Posted:

I just noticed Tom's response to my post. Sorry if I implied to anyone that there are not specific standards, there are as Tom noted. My example translates those standards into language that homeowners can understand rather than legalese which is not understood. Safety of principle is not implied, it is required under the standards Tom quoted. Thanks Tom for giving an example of my statement regarding maximizing yield based on liquidity needs.

DavidH3 (Florida)
Posts: 5

Posted:

I agree completely that safety of principal is paramount, anything else is unsuitable. To simplify my question, what are your thoughts/experiences of using extrememly conservative, albeit non-FDIC insured investment vehicles. The options I am proposing are Mutual Fund Money Market Funds that invest only in US Treasuries and US Government Agency Products which are backed by the US Government. In my 15+ years in the investment profession these are as safe and conservative as you can get. I have proposed this as an option to keep liquidity and obtain a slightly higher yield but I am running into the stigma of not having FDIC insurance in peoples eyes is "risky".

RogerB (Colorado)
Posts: 5,067

Posted:

David, I have found most Board members feel the same way as those you are trying to convince. They do not have your knowledge and experience in investing and are therefore not comfortable with your good idea. They too believe safety of principle is paramount and that is the underlying principle of the statutes to which Tom referred. But to them your suggestion may feel like a 1 in 50 chance on a horse at the race track. So you probably won't win either race

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