Investing reserves

Started by ArtT5 • 23 replies • 1455 views

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ArtT5 (Illinois)
Posts: 84

Posted:

Syndicated columnist Benny Kass responded to a question about investing reserve accounts in his most recent column:

http://www.chicagotribune.com/classified/realestate/sc-housing-0721-qa-benny-kass-consumer-20160721-column.html

He seems to be saying any investment that could produce a loss that isn't guaranteed by the government is off limits. I disagree. Here's what I wrote in an email to Mr. Kass:
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An association board has a fiduciary duty to manage these funds prudently, and protection of principal would be one of the main objectives. Yet a fiduciary is also charged with obtaining a reasonable rate of return, and does not need the permission of beneficiaries to take reasonable risk in pursuit of such returns. The level of risk that is reasonable depends on circumstances, but the law has never required fiduciaries to take zero risk, particularly with money that is invested for long periods of time, as may be the case with reserve funds. In fact, taking zero risk over an extended period of time, when prudent alternatives that offer an expectation of higher returns are available, could be as damaging in the long run, and as much a breach of fiduciary duty, as taking too much risk.

There may be states where local law prohibits an association board from taking any risk with reserve funds, and there may be associations with governing documents that prohibit such risk. Furthermore, as a practical matter, associations have to deal with what may be a very low level of tolerance for investment risk among their members. Yet a categorical statement that associations can never expose reserve funds to even a modest level of risk is not correct.
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Thoughts, anyone?

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Art

You both have an opinion. When responsible for other people's money, I advocate as secure an investment as one can get even if only a few %.

RichardP13 (California)
Posts: 3,868

Posted:

Art

Are you qualified to take that risk and are you willing to be held accountable?

NpS (Pennsylvania)
Posts: 4,216

Posted:

For openers, the question put to Kass was about an HOA with $1.5M in reserves.

For much smaller HOAs, I think Kass' advice was correct - Government guaranteed only. The big issue IMO is not the "fiduciary responsibility" but the "skill set" of the people making the decision. There are board members who don't even know how to read a balance sheet - I wouldn't want any of them making investment decisions just because no one else wanted the job, so they now have the title "fiduciary" by default.

Kass seems to back-pedal a bit when he talks about having a good investment counselor. Don't know that one would be needed by the way he's talking. Maybe Kass is talking about investing in municipal bonds, but that's not necessarily a low risk investment these days.

If you are a "fiduciary", it's your job to know how risk-averse your principal is first, and only then should you decide what risks to take. If you think you know how to take the pulse of your community, great. But I doubt that many boards do it or even know how.

Sikubali jukumu. Read all posts at your own risk.

JH6 (Virginia)
Posts: 30

Posted:

It's hard to have this discussion without talking about the price of risk, which seems a bit absent from the discussion in the OP. Let me step back and say that from a theoretical position, the goal of the reserve fund financial plan should be to match assets and liabilities perfectly. That's really the gold standard of this type of financial stewardship. It's something things like reserve funds / pension funds / etc. should strive to achieve.

To this end, in a perfect world, the association would buy actuarially fair "insurance" on all of your reserve obligations. So if there were a 50% chance you'd need to buy a roof next year, you'd pay a statistically fair price based on the cost of the roof next year and the probability that you'd need the roof year. If you ended up needing the roof, it's covered. If not, it's not covered, and then you buy another insurance policy for the following year. Basically, the HOA would be paying a fair price each year for the cost of repairs. Life would be good. For many, many reasons, this insurance market doesn't exist right now and probably will never exist. This is why HOAs have reserve funds instead, ideally to try to mimic this theoretical but non-existent insurance market.

For that reason, a good reserve fund strategy should tailor its investment strategy to its anticipated obligations. If the only thing you had to pay for as an HOA would be repaving a street, and that reliably happened every 10 years, then it's relatively easy. You'd buy risk-free interest-bearing instruments with a term that expired exactly when you'd want to pave that street. For example, if the road needed to be repaved in 2025, all of your CDs and bonds would come due in 2025 and the money would be available. And you'd be earning the best interest rate possible, because you'd be picking long-term instruments to that expire in 2025.

Now let's say in this example you use a more aggressive strategy with equities or something else for your fund. And you've been funding it with the reasonable expectation of higher returns. If you hit your target, you're good and everyone saved some money. If you exceed your target, same thing. If, however you fall 20% short that year because of a recession and that road has to be repaved, you're now stuck asking the association members to put in an addition two years worth of reserve contributions to the fund to repave that road in a year in which (a) many of whom already lost 20% of their personal savings or (b) may have lost their jobs.

That's the price of risk. It's not only that you might fall short, it's that you might fall short when people can least afford to fall short. And that is why many people sensibly argue for risk-free instruments in their investment portfolio.

That's not to say that there isn't necessarily a place for higher-risk, higher-expected return investments--we've all fantasized about that at one time or another--but that it needs to be done in consideration with what the reserve obligations are such as whether they can be delayed indefinitely and whether or not they're correlated with financial market conditions.

SheliaH (Indiana)
Posts: 6,964

Posted:

I’ve wanted to have our board evaluate our reserve investments for some time, but when I was Board treasurer, we had (and still have) so many problems with delinquencies, it was difficult to even broach the subject. Our documents specifically state the association can only invest reserves in accounts where the principal isn’t put at risk, so we’re limited to CDs and money market funds (I don’t think we have any in bonds).

I like JH6’ comments about risk – that should be considered when evaluating reserve investments because you don’t want to put money in something that loses a lot of value and now you need the money for a major repair or replacement. I also like NpS’s statements – before I left the board, I suggested that we gradually increase reserve deposits. After we commissioned a reserve study in 2012 to take effect in 2013, I noted that we deposited less than 10% of assessments into reserves and suggested beginning that in 2013 we set the deposit percentage at 10% and then increase it by 1% every year until we hit 15% and see where we were.

By then I hoped we would have made a dent in our delinquencies to hold it at 15% for five years and restart a gradual increase until we reached 20%. I was also hoping that we would make the time to at least talk to the association bank about other investment options that would comply with our documents and give us a better rate of return (I seem to recall 2% or thereabouts was the best in return I saw before I left the board in 2014.

When I looked at our 2016 budget, the board reverted to the 9% deposit (it didn’t raise assessments). Although I can appreciate getting a break on assessments this year, we would have been better off increasing it by at least 3%. It’s bad enough that the 2012 study indicated we were so far behind we may never catch up (at least a gradual increase would be a start), but now I fear it’s no longer a matter of if, but when we’ll have to consider special assessments. That conversation won’t be pretty, but sadly, delinquencies are still a huge problem, although we have managed to get rid of some of the older accounts.

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

JonD1
Posts: 2,350

Posted:

I think this is quite an interesting discussion.

And the post about risk and what might or might not be acceptable was quite well thought out and valuable.

My concern having served now 29 years on our board I have yet to meet anyone whom I would feel comfortable exploring different investment options if permitted under the documents. Most past, and current board members have a tough time handling their own finances and investments to now suggest they somehow plot a course for investing the property's reserves would keep me up at night.

I have some knowledge of investments and have handled my own portfolio for more than 25 years. I do though have no desire to now take on the investment of our reserves with the possible risks to principle that is are possible in today's markets. To much uncertainty and responsibility for me.

We now have about $500,000 in reserves. When I took over as president we had $0 in reserves 13 years ago. We have almost all in CDs at a local credit union and in the past when interest rates were higher and more competitive we would shop around for the best returns.

And one last observation about about financial advisors. I would never seek products through a local bank. These are sales people selling products that serve their bottom line. Fees, commissions and incompetent advice are all to often the best many advisors have to offer. " Nobody watches your money like you do." And " never invest in something you do not understand." My guess most board members would be ill equipted to handle investing the property's reserves if permitted.

SheliaH (Indiana)
Posts: 6,964

Posted:

I'd love to know how you increased your reserves - we're not starting from zero, but when I looked at the year ending report for our community, our reserves were at the same level they were when we got our 2012 reserve study! We had made a little progress, but then had some unexpected major expenses involving the common area, and of course, the delinquencies we've struggle with didn't help. We did get rid of a few, but had to eat quite a lot because of the usual reasons (e.g.mortgage company drags its feet on a foreclosure, tax sales preempt everyone, etc.)

On a somewhat related matter, our board recently made the decision not to write off any delinquent accounts - I don't know (yet) how they came to this decision, but I'm wondering why they would continue to carry an account that keeps growing and growing. If they're making progress in collecting, fine, but part of me wonders if they're doing this to make the numbers look good (which they really don't). Any thoughts on why this might be happening?

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

DanaT (Tennessee)
Posts: 214

Posted:

Quote:

Posted By SheliaH on 07/26/2016 4:28 AM
I'd love to know how you increased your reserves - we're not starting from zero, but when I looked at the year ending report for our community, our reserves were at the same level they were when we got our 2012 reserve study! We had made a little progress, but then had some unexpected major expenses involving the common area, and of course, the delinquencies we've struggle with didn't help. We did get rid of a few, but had to eat quite a lot because of the usual reasons (e.g.mortgage company drags its feet on a foreclosure, tax sales preempt everyone, etc.)

On a somewhat related matter, our board recently made the decision not to write off any delinquent accounts - I don't know (yet) how they came to this decision, but I'm wondering why they would continue to carry an account that keeps growing and growing. If they're making progress in collecting, fine, but part of me wonders if they're doing this to make the numbers look good (which they really don't). Any thoughts on why this might be happening?

Hello Shelia, most often, there are three ways an HOA can generate monies, that I know of, others may be able to add to my list. Dues, Special Assessments and Investments. As far as building your reserves, 99% of the time, you can rule out special assessments, unless, that is what is being applied to, if it is even allowed by your State as well as your Bylaws.

As you mentioned, if your HOA has stopped writing off their delinquent accounts, this money may be able to be applied to your reserve fund as well. I have heard of Associations who have had bake sales as well as yard sales to fund a specific project or be applied to their reserves. From what knowledge I have concerning this issue, it is done by raising dues. If your BOD takes this approach, it would be to their benefit to have a very, very detailed explanation, on why it needs to be done.

They should hold a meeting to discuss their reasoning and allow any Member to openly speak, about their proposal. If a Home Owner is made aware of what may face their community down the road, it will go a long way then simply sending a letter with a 20% increase, over the previous amount. The prospect of building your reserve should be done as a "long term" investment. Home Owners are less likely to get offensive, if the increase is a small amount over a long period of time, rather then a large increase to get the figures up quickly.

Think about it this way. If your local power company told you they need to raise your rates to install more high voltage lines, most would ask, why? If they respond with, well, our projected usage with the amount of new homes being built in your area, is not upgraded, then all our customers in your area, would face power outages on a weekly basis. Now, as their customer, you think, OK, that makes sense.

Now, as their customer, would you rather have them say, we are going to increase your bill by $100.00 per month to cover our expenses, or, we are going to raise your average payment by 2% each month, for 3 years. This approach may work for your HOA. When most Owners have solid information about why something needs to be done, they are more likely to jump on board and support the increase.

As far as the "Investment" approach, it will require a lot in investment of time, as well as professional advice / cost, to make sure that the principal amount invested, is 100% safe. The returns on this type of investment, normally are extremely low. Just me $0.02.

JonD1
Posts: 2,350

Posted:

Many people today see only one possibility when it comes to improving their finances whether it be in their personal life or in this case an HOA community.

The most common solution is to raise or collect MORE money. Which in my view will never end.

We have raised our dues one time in the past 7 years. We have one of the lowest dues rates in our area for a property our age. The one increase was to fund a 10% automatic monthly transfer into our RESERVES. We have had no special assessments in that same time period. I don't remember the last one it was more than 13 years ago before my time as president.

If your plan is to live up to your income you will never dig out of the hole. If you don't work to seriously control costs you will never collect enough.
In my view you need to work both ends of the equation. How much you collect but also where that money goes and why.

Over the past 13 years we have built up our reserves which never existed. While putting in more than $500,000 back into the property in improvements and updates above and beyond normal maintenance. So our total increase combining savings and spending exceeds $1,000,000.00.Now most owners, including the vast majority of board members have no clue how this was done. Simply because they are not truly involved.

A few months ago our property manager mentioned at our board meeting that our property was the most finacially sound community he manages. He handles 13 other communities. We have the highest reserves, no debt, and have limited any increase in common charges.

Although some folks like to think board service is a rather simple, effortless endeavor IF you really do it right and want to make REAL changes it requires, time, effort, attention to detail, and a willingness to roll up your sleeves and do what needs to be done. That is what is lacking in most cases when positive change is required. Just follow the same course, climb deeper into the same hole and wonder how you got there.

Increasing dues to cover shortfalls in the end will create its own new problems for owners who cannot cover these increased costs. You will see more delinquent accounts, more foreclosure and require more legal expense chasing folks for money.

If you can't manage your own finances it would be impossible for you to now a mange the affairs of your community. That was why I worked to remove the board members who had held office here for more than 2 decades. That was why i worked to fire our former MC. That is why I worked to change the way things were done because we were heading in a very bad direction with a budget that could cover only absolute necessities and nothing more

But then generating over a million dollars in savings over 13 years while not increasing owner costs who couldn't do that?

JH6 (Virginia)
Posts: 30

Posted:

Quote:

Posted By JonD1 on 07/26/2016 6:40 AM
Many people today see only one possibility when it comes to improving their finances whether it be in their personal life or in this case an HOA community.

The most common solution is to raise or collect MORE money. Which in my view will never end.

If your plan is to live up to your income you will never dig out of the hole. If you don't work to seriously control costs you will never collect enough.
In my view you need to work both ends of the equation. How much you collect but also where that money goes and why.

There's really no escape from this conclusion. Any other means of balancing obligations and resources is just rolling the dice.

SheliaH (Indiana)
Posts: 6,964

Posted:

Thanks DanaT and JonD for your comments!

When I was Board treasurer, we were raising assessments by 3% a year, which came down to an annual increase of $60 (we pay monthly), and since I was also newsletter editor, I tried to explain to people why they were necessary, discussing unexpected expenses through the year, upcoming projects, etc. We also published periodic income/expense reports so people could see the numbers for themselves. Like you, I think if people know the story behind the numbers, they’ll usually accept what the board is doing. It’s less stressful (sometimes) to talk to educated people as opposed to those who’d rather pull stuff out of their behind because it’s less complicated!

But now, I wonder if the board is being as candid as it should be. After I left the board, I continued working on the newsletter until that ended last year (we’d finally established a website.) Before the last print issue, I had an exchange with the Board because they wanted to delete the financial summary from the newsletter – I thought that was a bad move and said so, but since the Board ultimately controls the content, that was that. They don’t even put periodic income expense summaries on the website. Someone on this website suggested we could create a members only section where people could get that information in case there were concerns about the whole world knowing our finances – I made that suggestion and the board just sat there.

It may be part of the problem is we no longer have a board treasurer – no one seemed interested in doing some of the things I tried to do, although everyone would nod and say they appreciated it. Our now former president did read the treasurer’s reports, but he doesn’t have internet access and computers scare him, so he wouldn’t get it until the meeting. And now, he’s out of the Association because he recently sold his house. We’ve never had a formal finance committee which could do some research to save time for the Board, but many of our owners live off-site and don’t seem to know or care what’s going on every day in the community.

I do agree we need to take a long hard look at the budget to see what can be reduced – in fact, this may also mean taking a look at our outdated CCRs because it’s occurred to me that if the Association continues to have financial issues, we may have to consider if it can still provide certain services. If not, a change in the documents may be necessary – if people keep on yapping their fees are “too high,” maybe they need to take on more responsibility to keep them “low”. Sometimes people straighten up when they realize THEY will have to pay the bill.

Jon, you’re absolutely right when you said “Increasing dues to cover shortfalls in the end will create its own new problems for owners who cannot cover these increased costs. You will see more delinquent accounts, more foreclosure and require more legal expense chasing folks for money.” That’s the primary reason assessments weren’t raised this year, but our community is over 45 years old so it’s a damned if you do/don’t situation.

Sometimes I wonder if the homeowners (and the board) don’t see themselves as homeowners, but as glorified tenants. They (or their tenants – many owners live offsite) treat the property any old way, expecting the Association to swoop down and fix it like yesterday, which isn’t fast enough – and then bitch about assessment increases because they’re “too high” and their property values are too low. It’s enough to make you laugh, cry or go stark raving bonkers.

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

JonD1
Posts: 2,350

Posted:

Quote:

Posted By SheliaH on 07/26/2016 9:17 AM
Thanks DanaT and JonD for your comments!

When I was Board treasurer, we were raising assessments by 3% a year, which came down to an annual increase of $60 (we pay monthly), and since I was also newsletter editor, I tried to explain to people why they were necessary, discussing unexpected expenses through the year, upcoming projects, etc. We also published periodic income/expense reports so people could see the numbers for themselves. Like you, I think if people know the story behind the numbers, they’ll usually accept what the board is doing. It’s less stressful (sometimes) to talk to educated people as opposed to those who’d rather pull stuff out of their behind because it’s less complicated!

But now, I wonder if the board is being as candid as it should be. After I left the board, I continued working on the newsletter until that ended last year (we’d finally established a website.) Before the last print issue, I had an exchange with the Board because they wanted to delete the financial summary from the newsletter – I thought that was a bad move and said so, but since the Board ultimately controls the content, that was that. They don’t even put periodic income expense summaries on the website. Someone on this website suggested we could create a members only section where people could get that information in case there were concerns about the whole world knowing our finances – I made that suggestion and the board just sat there.

It may be part of the problem is we no longer have a board treasurer – no one seemed interested in doing some of the things I tried to do, although everyone would nod and say they appreciated it. Our now former president did read the treasurer’s reports, but he doesn’t have internet access and computers scare him, so he wouldn’t get it until the meeting. And now, he’s out of the Association because he recently sold his house. We’ve never had a formal finance committee which could do some research to save time for the Board, but many of our owners live off-site and don’t seem to know or care what’s going on every day in the community.

I do agree we need to take a long hard look at the budget to see what can be reduced – in fact, this may also mean taking a look at our outdated CCRs because it’s occurred to me that if the Association continues to have financial issues, we may have to consider if it can still provide certain services. If not, a change in the documents may be necessary – if people keep on yapping their fees are “too high,” maybe they need to take on more responsibility to keep them “low”. Sometimes people straighten up when they realize THEY will have to pay the bill.

Jon, you’re absolutely right when you said “Increasing dues to cover shortfalls in the end will create its own new problems for owners who cannot cover these increased costs. You will see more delinquent accounts, more foreclosure and require more legal expense chasing folks for money.” That’s the primary reason assessments weren’t raised this year, but our community is over 45 years old so it’s a damned if you do/don’t situation.

Sometimes I wonder if the homeowners (and the board) don’t see themselves as homeowners, but as glorified tenants. They (or their tenants – many owners live offsite) treat the property any old way, expecting the Association to swoop down and fix it like yesterday, which isn’t fast enough – and then bitch about assessment increases because they’re “too high” and their property values are too low. It’s enough to make you laugh, cry or go stark raving bonkers.

1) most owners have no clue what it takes to manage the affairs of their property
2) most board members have no clue what goes on day to day around their community
3) the more you do the less anyone else needs to do
4) appreciation is wonderful CONTRIBUTION is far more helpful
5) when given a choice most people take the easy way out
6) most owners remaining ignorant
7) most owners don't see themselves as having a role in overseeing the affairs of their home and investment ( you were right more like tenants who pay someone else to deal with it whether good or bad)
8) most owners are lazy, disinterested, passengers who simply can't be bothered to involve themselves and truth be told when on rare occasion they do they have little if anything to offer
9) most owners have no issue demanding more from everyone else like repairs, services, improvements some of which are many times unrealistic while their own effort remains the same ZERO
These are some of the lessons I have learned while serving 29 years. It is sad to know once my efforts end this property will fall into the same patten many others now find themselves in. Why because no one else is interested in putting in the effort. We have a country full of them. Do as little as possible and demand more. HOAs in my view are simple a reflection of our society. There are the few that actually do and the many that live to do nothing.
Sad but reality.....

KerryL1 (California)
Posts: 14,550

Posted:

You know, Jon? I think your enumerated list would make a wonderful subject on this forum. Maybe some subject line like: Do HOA Owners Expect Too Much & Give Too Little?

For one thing, I'd like to respond to some of your assertions and the list doesn't fit this thread. I only have 9-1/2 years on the board vs. your 29, but I've made it my business to learn a lot. So here I am, contemplating reelection in Oct. Ready to retire, but worried the my own achievement plus those jointly with a few other directors over those years, will slip away.

AugustinD
Posts: 5,144

Posted:

Quote:

Posted By ArtT5 on 07/24/2016 11:44 AM
In fact, taking zero risk over an extended period of time, when prudent alternatives that offer an expectation of higher returns are available, could be as damaging in the long run, and as much a breach of fiduciary duty, as taking too much risk.

Your argument seems to rest on the assumption that the money will just sit there, invested in say a mutual fund of blue chip stocks, for an extended period of time. Truth is an investment in this mutual fund today could easily be worth less in five years. Also Board members mess up all the time in trying to anticipate major expenses, and cash that is needed instantly will come from selling mutual fund shares at a loss. I do not buy your reasoning at all.

I expect the licensed auditor typically required by the governing documents to review the books would not support investing reserve funds in stocks. Learning a HOA I was thinking of buying into had thusly invested its reserves would make me not want to buy into it.

What do charitable non-profits do? I recall they're pretty conservative.

The author of the article you cited is an attorney. I bet he has case law to back up his assertions.

On the other hand, boards of directors are typically amateurs who often think that the law does not apply when it should be obvious it does. I am not surprised that your argument would appear here. Hopefully it's just a 'testing the waters' argument that is never implemented.

DanaT (Tennessee)
Posts: 214

Posted:

Quote:

Posted By JH6 on 07/26/2016 8:21 AM

There's really no escape from this conclusion. Any other means of balancing obligations and resources is just rolling the dice.

I am fascinated by most things that deal with HOAs. One only has to go to YouTube and type in "bad Hoas" to watch some horrific footage of tyrants, conducting business as usual. In my area, real estate agents go out of their way, to make sure people looking to buy, are aware that their listings are "Non HOA". So, what does this have to do with building reserves? Sadly enough, in 2016, we forget all of our Members / Neighbors who are put in the position of having to sell their homes, due to the increase of dues.

As most have stated, that truly is going to be the deciding factor in order to build the reserves needed, to function in 2016. I find it disheartening that people that live in my community, who are the original owners, who have been retired for the last 10 or 12 years, can no longer afford to live here, if the dues keep going up.

I am sure that other communities have the same issues, concerning Members on a fixed income. The worst thing is, I know that HOAs must do this, to protect the Association as a whole. It truly must be a very hard / bitter pill for "Good BODs" to swallow, knowing it could very well be their decision, that would force someone from their home. So, to all the Good BODs out there who look out for their communities, I tip my hat to you!

SheliaH (Indiana)
Posts: 6,964

Posted:

And THAT is why I’ve concluded some people shouldn’t be homeowners – it’s not that they aren’t nice people, but they really don’t understand the work that goes into maintaining a house. Others have said it before on this site about townhouse communities like mine – they buy in because the property’s affordable, but don’t understand you need to put forth some effort in keeping it that way. They also believe the poppycock about “the association takes care of everything – just pay your fees and do whatever you like.” As everyone here knows, prices do go up, but preparing for the worst and just taking care of your stuff, not to mention being a good neighbor can go a long way.
Back to reserves – while I don’t want to return to the board (I was on it for 10 years and need to recover), I will express my concerns to the board and suggest that we establish a finance committee that can do a deep dive into the operations and reserve budget and see where we might be able to reduce costs. Here are some of my musings – any suggestions on what to add or subtract are most welcome:

We need to establish a formal policy on reserves – how often reserve studies should be done; define a reserve item vs. something that should be covered by the operations budget; under what circumstances can the association borrow from reserves (if at all), how soon those loans must be repaid and how much interest should be applied, etc.
Consider a one-time (hopefully) special assessment to inject some funds into reserves.
Conduct a formal review of the property management contract. I like our property manager, but the contract hasn’t been reviewed in years. Since 40% of our budget goes towards administration expenses, I think this would be a good place to start
Work with the master insurance carrier to review the policy and help develop a risk management plan. We’re fortunate that we haven’t had a lot of claims (we lost one policy shortly after I brought my home because of that), but we’ve never spoke to them about any patterns that the Association might be able to change.
As we collect on delinquencies (some of them anyway), put half of those proceeds into reserves. Right now, I think everything gets dumped in the operations budget – it really is needed there, but reserves needs a little bit, too
Find a use for our undeveloped land or lease it – or sell it. A developer wanted to buy it some years ago for a dollar store, but we were concerned about noise, traffic and crime. If we’re going to keep it, I’d rather clear the land and lease it to the city for a park or perhaps a church for a community garden.
I still want to gradually increase our reserve deposits with the 1% plan I mentioned earlier

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

DanaT (Tennessee)
Posts: 214

Posted:

Shelia, I think you are a asset to your community. I hope your BOD takes a hard look at your proposals. It is refreshing to see Home Owners who have a deep desire, to be involved with their community.

ArtT5 (Illinois)
Posts: 84

Posted:

Many thanks for the responses. I'm not really advocating for more risk in general. My concern is that someone writing as a lawyer would state the case so strongly, when the law provides more latitude. Each association has its own situation in terms of investment horizon, liquidity needs and risk tolerance, and has to find a solution that fits its needs. Kass, by the way, has not responded to my message.

LetA (Nevada)
Posts: 2,679

Posted:

Ill throw these two on the stoop and see if the cat licks it up.
Since HOA's in Nevada are Not for profit entities, I have the following qualms. Lets just say the reserve account is in a simple interest bearing account, should the interest be allowed to grow in the account or should the interest be divided among the association members?
Second.. Now the aspiration has to file and pay the IRS taxes on that "income" thus losing or questioning the tax exempt and not for profit standing/

RichardP13 (California)
Posts: 3,868

Posted:

Quote:

Posted By LetA on 07/26/2016 8:31 PM
Ill throw these two on the stoop and see if the cat licks it up.
Since HOA's in Nevada are Not for profit entities, I have the following qualms. Lets just say the reserve account is in a simple interest bearing account, should the interest be allowed to grow in the account or should the interest be divided among the association members?
Second.. Now the aspiration has to file and pay the IRS taxes on that "income" thus losing or questioning the tax exempt and not for profit standing/

Are you saying only HOA's in Nevada are "not for profit"?

How much interest do you think is being paid out in today's market? If you do give it back to the members, they would have to pay the tax based on their individual tax bracket.

Earning interest on your bank accounts does not make an association lose their tax status. Running a golf course, restraunt or renting out your clubhouse definitively would.

TimB4 (Tennessee)
Posts: 21,061

Posted:

LetA,

Keep in mind that a nonprofit (not for profit) corporation is not the same as a charitable organization.
Typically, once an HOA is provided a nonprofit status, the IRS doesn't look twice (if it was a charitable organization that would be different).

The interest you are concerned about or, since the thread is about investment, the returns (dividends, capital gains), are indeed considered taxable income. Provided the interest/return isn't too much, the Association simply pays taxes on that income when they file a 1020-H.

Those same returns/interest (if the Association does it correctly) are given back to the members in the form of a lower contribution to the Association's Reserves (which results in a lower assessment) or as an offset to the operating budget (which also results in a lower assessment).

Tim

DouglasK1 (Florida)
Posts: 2,046

Posted:

Quote:

Posted By TimB4 on 07/27/2016 5:49 AM
Those same returns/interest (if the Association does it correctly) are given back to the members in the form of a lower contribution to the Association's Reserves (which results in a lower assessment) or as an offset to the operating budget (which also results in a lower assessment).

I'll echo this, non-profit does not mean "non income generating", it would be stupid to forgo collecting interest as long as it doesn't put the principal at risk. There is no reason to "rebate" interest income to members unless the reserve funds are wildly over-funded. Your reserve study should include expected interest in the calculations that determine how much annual contribution is needed. Interest income could help reduce the amount that owners need to add to the reserve fund, thus reducing annual dues.

Escaped former treasurer and director of a self managed association.

TimB4 (Tennessee)
Posts: 21,061

Posted:

Quote:

Posted By TimB4 on 07/27/2016 5:49 AM

the Association simply pays taxes on that income when they file a 1020-H.

Correction on the typo.

The form they would file would be 1120-H

Sorry about that.

Tim

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