Savings Solutions: A Primer for Investing Community Reserve Funds

Community associations should consider three top priorities when investing reserve funds: coverage, liquidity, and return.

Before investing association funds, communities must review state statutes regarding the deposit and investment of community funds. Once that evaluation is complete, boards need to develop a clear, written investment policy that is understandable to everyone regardless of financial knowledge to guide future decisions.

A financial advisor who has industry-specific expertise and experience can help. Ask questions to make sure they are aware of and understand specific state statutes surrounding common interest housing.

There are several safe and reputable vehicles associations can use to invest reserve funds such as:

Savings bonds and treasury bills

These are the safest investments and are backed by the U.S. government. However, a single manager must be assigned to conduct business on behalf of the community, which can be challenging with changing board membership and management.

Money market and certificates of deposit accounts

These are savings accounts that are liquid and accessible. The minimum opening deposit is $1,000; the rate of return fluctuates, and there are withdrawal limits. Chuck Balacy, vice president with CIT, a division of First Citizens Bank in Henderson, Nev., recommends associations start with a money market account and then look at certificates of deposit, which is a fixed-rate, timed investment with a higher rate of return.

Insured cash sweeps

ICS is connected to checking accounts and is good for communities that may need access to the money easily. Minimum deposit is $50,000. Rates fluctuate and the product includes $10 million in Federal Deposit Insurance Corporation protection.

Certificate of deposit account registry service

A timed investment between four and 52 weeks with a minimum opening deposit of $10,000. FDIC insured up to $50 million.

No matter which vehicle is chosen, it’s important to make sure the investment instrument is protected by the FDIC.

Tony Troilo, who also is with First Citizens Bank in Henderson, Nev., recommends associations think about the structure and functionality of their investments and “ladder” or disperse funds into different accounts to give communities the utmost flexibility to pay for repairs and maintenance when needed and future investing.

Some underfunded associations may consider applying for loans to pay for necessary maintenance and repairs, Balacy and Troilo advise. A long-term loan may offer a lower interest rate and more reasonable costs to homeowners over time. Before going the loan route, discuss options with an attorney, reserve specialist, and other professionals involved and be sure to communicate plans with homeowners.

Finally, boards need to reflect on many things including the purpose of the loan, how much is needed, number of delinquencies, level of current assessments and any pending litigation before borrowing funds.

>>Learn more in CAI’s on-demand webinar “Dollars and Sense: Understanding Community Association Banking.”

>>Read more in CAI’s Reserve Studies and Funds book.