HOA Homefront – How Should We Invest HOA Funds?

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Question: HOAs are facing a financial problem with interest rates so low. My HOA and the vast majority of other HOAs play it safe with CDs and money market accounts for investing. I oppose it. Now that we’re on average well below 1.5%, the risk for HOAs is enormous. It’s easy to increase HOA fees for homeowners by 3% per year and that will cover annual operating costs and maybe some replenishment. These reserves on the whole, however, will lose value over time due to inflation and rising costs.

HOA management companies have financial advisers who warn about the risk of getting into stocks / bonds. But HOAs need to earn more. Otherwise, the HOA fees will increase more and more. And then the property values ​​will go down.

TS, San Diego

Question: With the historically low interest rates in the bank money market and the CDs for our reserves, it seems to me that the board has a fiduciary duty to manage these funds as the role of a trustee in the management of a defined benefit pension plan for its employees. I think you could have a diversified fixed income portfolio for safety and return and a value equity portfolio for income and growth and a little bit of growth. What do you think of this approach? Respectfully,

RS, Palm Springs

A: Dear TS and RS:

Davis-Stirling Act currently requires managers to deposit HOA funds into a federally insured account (Section 5380 (a) of the Civil Code). Additionally, starting in 2022, AB 1101 (sponsored by the Community Associations Institute) adds to section 5380 an additional ban on investing HOA funds in “stocks or other high risk investment options.”

There is no similar explicit restriction on the actions of the board in this regard, so theoretically a board could bypass management and invest funds in ways that are not provided by the federal government, or even in ways that are not assured by the federal government. stocks or mutual funds. So it’s tempting to look for higher yielding (and riskier) investments for HOA funds. However, it is important to remember that, as RS correctly notes, HOA administrators are trustees of the HOA funds in their custody, and they can arguably be held accountable if there is any. a loss of capital due to a slowdown in investment. . If the HOA is to invest its funds in a manner other than that authorized by the managers, boards of directors will need to consult investment advice and develop a written investment policy. This will help keep the board of directors under the business judgment rule (Company Code Section 7231.5).

With respect to the concern about the erosion of reserve funds accumulated due to inflation, the preparer of the reserve study presumably takes this into account in his long-term financial recommendations.

RS and TS, some HOAs are so large that they cannot keep all of their funds in insured accounts, and therefore must pursue investment strategies that reasonably protect HOA funds while providing a reasonable return. These HOAs should have outside financial advisers or companies to monitor and advise their funds.

The federally-assured approach may not be the best for increasing HOA reserve funds, but it is the safest. This is why managers and lawyers generally recommend it to all associations, except the largest ones, in order to prevent unpaid volunteers from taking personal risks in this regard.

Kelly G. Richardson, Esq. is a member of the College of Community Association Lawyers and a partner of Richardson Ober DeNichilo LLP, a law firm known for providing advice to community associations. Submit your questions to [email protected] Previous columns on www.HOAHomefront.com


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