Investment Policy for HOA Funds

Started by AlexL1 • 18 replies • 4225 views

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AlexL1
Posts: 303

Posted:

Is it feasible for an HOA to have a "type" of plan for its "investment policy"?If it is, then what would be.... could be/ some of the criteria which such a development plan could work? and STILL be a certified investment policy?

SusanW1
Posts: 5,197

Posted:

Our HOA documents forbid investments, but we can have money markets and interest bearing savings and checking accounts.

GloriaM
Posts: 820

Posted:

Alex:

Federal law will only allow HOA's to invest in an FDIC safe vehicle. CD's, money market or savings account.

No HOA is allowed to play with funds in the stock market or junk bonds. Even still the HOA can make money if the stagger their CD's in interest. I usually for all of my communities, place liquid money in a money market, if the HOA has a plentiful reserve; then I will with board approval place in increments of $1,000 to $5,000 into 3 mth, 6 mth, 9 mth, 1 year and 2 year CD. This way the HOA always has money maturing. If they don't need the funds as it matures they can just roll it over.

I had 1 HOA in 1 year make over $4,500.00 in interest alone. This is not only a safe avenue, but legally the only way allowed.

SusanW1
Posts: 5,197

Posted:

Our bylaws also state the establishment of a Reserve Fund. This gives permission for HOA to even have this money. Our Reserve Fund study says that we need to get close to a milliion dollars in reserve within the next 20 years to cover expected expenditures. This money is separate from annual operational funds and is "restricted" in its useage.

The very nature of a non-proft is that it is supposed to take in as much money as is required to operate, no more. That's why it's called it a "non-profit".

GloriaM
Posts: 820

Posted:

Susan:

My prior post is with regards to a reserve fund, not an operating account.

AlexL1
Posts: 303

Posted:

Sorry I misled in my question above... It was in no way to imply investments in stock market/etc but ONLY in CDs/interest checking accounts/money market accounts.... and secondly, it was for the reserve fund primarily even though a checking acount might be drawing But.. does that in itself constitute the development of a financial policy?

Secondly: When the HOA purchases items (primarily in quantity), can they get by without having to pay the vender sales tax.... in view that the HOA in itself is a non-profit Organization??

AlexL1
Posts: 303

Posted:

Gloria:

Ref this statement of yours: " place liquid money in a money market, if the HOA has a plentiful reserve; then I will with board approval place in increments of $1,000 to $5,000 into 3 mth, 6 mth, 9 mth, 1 year and 2 year CD. This way the HOA always has money maturing. If they don't need the funds as it matures they can just roll it over." My question is why only $1,000, etc... why not $50,000 increments.. i.e. having three of them and staggered? I know that the FDIC only insures up to $100,000 so anything over that... one could go to another bank or just take a chance the bank would not "FOLD"....

GloriaM
Posts: 820

Posted:

Alex:

Not many HOA's are so blessed as to have $50,000.00 to place into CD's. I was giving an example which was contigent on that HOA's finances. Without knowing how much money they have in reserves, I was giving a general guideline of incriments of $1,000.00 to $5,000.00.

By all means my guidelines would change if an HOA was blessed as having $500,000.00 in their reserves. Unfortuanetly I have found in most cases some of the HOA's I have taken over here in NC previous management didn't even have a reserve account for them.

I always segrogate operating from reserves and investigate ways to accrue interest for the HOA, such as a sweep account or my previous post.

AlexL1
Posts: 303

Posted:

Gloria:
Thanks for ur input.. Well, maybe we are blessed. I am new at this so for that reason was questioning the $1,000, etc Sorry 'bout that !!! I will have to google to find out what a "sweep" account is.

GloriaM
Posts: 820

Posted:

Alex:

A sweep account is where your bank (if they offer it) will have your operating account tied to a sweep account. Every night a balance must be met in the operating of $40,000.00, any thing that is over that amount it is swept nightly into this tied in account that accrues a nice interest rate.

I would suggest it only for an HOA that has an income of over $150,000.00 that can afford leaving a large sum in operating. In this sweep account I have accrued over $3,000.00 annually for the HOA, along with staggering the CD's for a combined interest accrual of $7,500.00 for the year.

JimM10
Posts: 48

Posted:

Do you know what banks charge for "administerin" a sweep account?

RobertR1
Posts: 5,115

Posted:

Happy Holidays Jim.

I know some banks charge nothing and maybe some charge something. What a question, I'm sitting here in SC and you are asking what the local banks charge in your area. Call them and ask them Jim, it is no secret and not difficult to understand, Gloria gave an excellent picture and I am sure if you Google "Sweep account", you will learn more.

StanK
Posts: 2

Posted:

Our HOA has a "financial guru" who is advising us to invest HOA funds in Junior Subordinated Debentures. Of course we are not going to do this and will continue to place funds in FDIC insured accounts and CDs. However, I have been searching for some Federal or State (Florida) restriction that would make it easier to dismiss our expert. Can you cite the source for your statement "Federal law will only allow HOA's to invest in an FDIC safe vehicle. CD's, money market or savings account."

It would be very much appreciated

DavidW5
Posts: 561

Posted:

Quote:

Posted By GloriaM on 12/18/2007 12:43 PM
Alex:

Federal law will only allow HOA's to invest in an FDIC safe vehicle. CD's, money market or savings account.

Gloria,

Can you provide the reference for the federal law you mentioned? Our association's Management Agent has allowed $300K to accumulate in a checking account ($100K FDIC limit)and has allowed two CD's to exceed $100K with compounded interest. I would like to be able to point the board to that federal law to they will direct the MA to fix this.

Dave

MaryA1
Posts: 6,993

Posted:

Alex,

You said: "Secondly: When the HOA purchases items (primarily in quantity), can they get by without having to pay the vender sales tax.... in view that the HOA in itself is a non-profit Organization??"

Non-profit does not mean tax exempt. I understand some HOAs are now applying to the IRS for tax-exempt status under 501(c)4 or 501(c)7. Unless your HOA has a tax-exempt designation, you are not exempt from paying sales tax.

Mary

RobertR1
Posts: 5,115

Posted:

MaryA1,
I think maybe this post is in the wrong thread but in any event, tell us some more about this Tax exempt status under 501 (c)4 or 501(c)7. On the surface this would save all HOA's and Condos some big money. Is this available for all states?

MaryA1
Posts: 6,993

Posted:

Robert,

Yes, it is available for all states -- it's Federal law. Check out IRS Publication 557 - Exempt Status for your Organization. It explains all the 501(c) designations. There is certain criteria which must be met to qualify. An application is made to the IRS and they determine if an HOA qualifies for a particular designation. I'm not sure that there would be big saving for ALL assn's. As it is now, under IRC 528 an assn is exempt from paying tax on all dues and assessments. For many assn's this means only paying tax on interest income which might be very minimal. I would recommend consulting with your CPA to make certain it would be beneficial for your assn to obtain tax-exempt status.

Mary

RobertR1
Posts: 5,115

Posted:

MaryA,
Thanks for the info. I looked up some of 501 sections and as far as I can see we take advantage of all we are allowed, without going to jail. I thought there may be something new. I will get the publication. We spent the bulk of our money on insurance, utilities (65 unit condo on ocean), management and a significant amount on materials, supplies to keep the place in good shape. If we could recoup the sales taxes, etc, that is added to any of our expenditures, it would be worth doing, but I think I am right that we do the best allowed. Thanks again.

BB3
Posts: 1

Posted:

Dave and Gloria,

I did not see in the thread of communication where the reference for the federal law regarding HOA's must only invest in FDIC or cash equivalent securities. Can you point me in the right direction please? I did review IRS 557 but did not find such a reference.

Thank you.

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