What to Include in Your HOA Reserve Fund Investment Policy (2024)

May 2014

You're the steward of the homeowner association's reserve funds, which means you must act wisely in investing them. Here our experts offer two contrasting views that will provide background to help you create reserve fund investment policy that will guide not only current board members but also provide continuity and direction for future boards.

The Rules of Investment

The first step in crafting a reserve fund policy is to find out the ground rules under which you operate. That requires you to check whether your state or governing documents permit your reserve funds to be invested in anything other than a basic, safe vehicle.

"In Florida, I'm not aware of any of those funds being invested in anything other than an interest-bearing or investment account," says Ben Solomon, an attorney and founder of the Association Law Group in Miami Beach, Fla., who for more than a decade has advised more than 500 associations and also represents developers through his second law firm, Solomon & Furshman LLP. "They must be liquid and available for component replacement. Associations may invest them in other things, but I'm not aware of it if they do."

Two Views on Reserve Investments

The next step is to think about policies that will guide not just your current board members but later ones, as well. There are two lines of thought on investing reserves.

"Because the financial acumen of board members varies substantially and will vary from this board to the next, I think there should be an introduction to the policy statement that sets forth the goals of the policy in very simple terms," says Debra A. Warren, CMCA, CCAM, PCAM, senior vice president at Dallas-based Associa®, a community association management company with offices throughout the United States, Canada, and Mexico. "Those goals should always be, first, the safety of the principal; second, the ability of the association to get to the money; and third, yield."

That's the majority position. But there is another perspective. "This is an area where I'm absolutely in the minority," says Bob Diamond, a partner at the law firm Reed Smith in Falls Church, Va., who helped write the Washington, D.C., condo act in 1976 and worked on the Uniform Condo Act, which 24 states have adopted. "I'm the outlier."

"In my documents, I provide that the board has to set the investment policy," explains Diamond. "But unlike most lawyers who do what I do, I don't require the reserves to be 100 percent invested in obligations guaranteed by the U.S. government.

"What's the purpose of the reserves?" Diamond asks. "They're to ensure when components of the project wear out, the money is there to replace them, preferably without a special assessment. If you're going to collect reserves, the goal isn't totally the preservation of principal. It's also not to make the greatest amount of income possible. It's to assure the reserves are sufficient to replace components when they wear out.

"If you invest in U.S. Treasury bonds at a half-percent interest today and inflation in construction costs is three percent, are you preserving the buying power of those reserves?" asks Diamond. "No. So I recommend boards invest up to 25 percent of their reserve funds in equities. Over the past 70-some years, there's basically been about a 9 percent annualized return for the stock market. If the inflation rate is greater than your interest rate, investing your funds in any vehicles that just give you the standard interest rate isn't preserving the buying power of your reserves. It's not enabling the replacement of those components at the end of their useful lives."

Diamond sums up his reasoning. "When you have to replace a component, you can cover the cost by investing at higher yield, albeit with higher risks," he explains. "Or you can have a special assessment. Or you can increase your contributions to reserves, but that doesn't make a whole lot of sense because individuals can invest that money and get better rates of return than the association. So I think an association's policy should be to maintain the buying power of its reserves so it can replace the components by taking minimal but acceptable risk. That's not to say you invest in start-up interests. It means investing conservatively and with money you won't need right away."

Consider These Inclusions, Too

You might want to add a few more provisions to your policy. "I think there should be a process about how decisions are made about investing so that it's not just given to the treasurer or any single board member," recommends Warren. "Instead, the policy should talk about the fact that the entire board makes decisions about reserve fund investments.

"It should also spell out that the board will create parameters governing the size of an investment it will make with a single institution, the maximum term, and the kind of insurance and protection it's looking for," explains Warren. "The policy should lay all that out, not necessarily saying what the board is going to invest in but the criteria the board will use to evaluate the investment."