Which banking institution for HOAs?

Hi All,

Our 314 single family home property owner association has a property manager with pretty good software tools, a suitable business like website allowing transparency to the business side of the POA (not a lot of branding possible) and is relatively competent. A few rough spots now and then, but no other better options.

Just now, after several months as president, getting my hands around all the components - starting to scratch at the finances.

The property management company does the accounting, billing, etc - we have an ops account and CDs at Mutual of Omaha Bank (Community Association Banc - based in Phoenix, AZ). We have complete visibility to financials, bills, assessment income, receipts, etc - pretty well executed.

We have 13 CDs earning 0.6%. The ops account earns 0.05% and is about double in size (we are getting ready to spend a lot in the next few months) to the totality of the CDs. The ops account has about twice the annual income from assessments in it right now (all assessments late after 31 Jan)

Several areas for me to delve into:
1. Why does the ops account have so much in it
2. Why are there so many separate CDs?
3. Is 0.6% competitive? (obviously doesn't sound like it is)
4. Tough one - can I even successfully pressure the property manager to use a different institution as his entire accounting system is tied into the BAC system?

Would appreciate your thoughts.

A lot of good questions, George, and kudos for asking them. I've seen rules-of-thumb that suggest the operations account should contain between 2 and 3 months of operating expenses as a cushion of sorts. The only way I know for an operations account to grow so large is over time. At the end of each year, what's left in the ops account is known as "retained earnings". In a for-profit corporation this money would actually be called, "profit". One danger of excessive retained earnings is the IRS may declare it to be, in fact, "profit", and that would subject it to tax since a Not-For-Profit association isn't really permitted any "profit".

In my HOA, we've had between $50k and $60k in "retained earnings" for each of the last 3 years. Our accountant advised us that by transferring that money into our Reserves each year, we're probably shielded from having to declare it as a profit subject to federal tax. It has certainly improved our Reserves outlook.

6 CDs sounds like a lot. My HOA had about that many way back just prior to the Great Financial Crisis when the association was earning upwards of $6,000 a year in interest. These days it sounds excessive but every situation is unique.

0.6% annual interest would be unacceptable in my opinion, although we were earning 0.1% up until last year; compared to that, 0.6% sounds pretty good, though. In 2019 we earned 2% by shopping around for good rates and none of it was invested in CDs; it was all in savings and money-market accounts protected by FDIC. It was a lot of work to obtain those rates.

Also take care that you're not co-mingling operating funds with the reserves. That's a big no-no but I'm pretty sure you know that already.

You should be able to direct the property manager where to put your reserves. There are good arguments why your property management company shouldn't even have access to your reserves at all beyond getting monthly statements. The biggest thing I'd want to know is, as you asked, why is there so much money in the operating account?

What George doesn't provide is how much money they have in their accounts. If you had $300K in an operating account, $500K in a money market and $1M in laddered CD's, there would be a different strategy than if the HOA had $150K between all accounts.

Again, the key is fully understanding a reserve study, when projects are due or becoming due and readily having the funds (without penalty) available. If you don't have a money market account tied to reserves, what happens to the CD's once they have matured?