HOA boards should invest funds carefully

Q: I live in a 117-unit town-house community that is almost 20 years old. The homeowners association board has accumulated more than $400,000 in reserve funds, which is all deposited in interest-bearing bank accounts at .050 percent interest rate or less.

The management company purports to represent about 100 HOAs, all of which have their reserve accounts in interest-bearing bank accounts.

I have tried to introduce the board to alternative financial vehicles to include treasurydirect.gov, state and municipal bonds, corporate bond funds and no-load mutual funds that offer index funds based on the Standard &Poor’s 500 Index etc.

Fear of the unknown is difficult to overcome.

Are there any legal restrictions to investments HOAs may make, other than the “reasonable prudent person” reference contained in the fiduciary responsibility rules?

What would be helpful is your recommendations, along with a list of appropriate investments which may be made by HOAs?

A: Investing your own money in municipal bonds, for example, is one thing. Investing the money of the association is another.

First, Nevada statutes state the board or community manager shall deposit or invest all funds of the association at a financial institution that meets these requirements: 1) It is located in this state. 2) It is qualified to conduct business in this state or has consented to be subject to the jurisdiction of the courts of Nevada and of the Nevada Real Estate Division. For obvious reasons, the law was passed to help protect the assets of the citizens of this state.

Second, money must be insured in a financial institution such as the Federal Deposit Insurance Corp., the National Credit Union Share Insurance Fund or the Securities Investor Protection Corp., or a private insurer approved pursuant to Nevada statutes or in a U.S. government security.

The problem with bonds is that they are subject to interest rates that can fluctuate. The value of bonds can be subjective based upon investors’ perception of their worthiness. Would your association invest money in municipal bonds with North Las Vegas?

If an association had to prematurely dispose of a bond and it does not have the same value to the investment world, your association would be selling the bond at a discount. You would lose some principal.

Bonds are not one-year investments. When a board commits money for, let’s say five years, they are making a decision that will affect future boards.

Many boards do not want to make such a decision. In addition, if you were to invest in a bond today, in five years, you face the possibility that interest rates are substantially higher than what the bond rate was.

Unless the board has some certified financial adviser to make such investment decisions, they do so at their own risk, as for most boards they would be acting beyond their scope of expertise, and that of the average community manager.

Q: Can a homeowners association legally disallow single-family home additions even though they meet city codes and conform to existing home appearance standards ?

A: Depends on the governing documents. They can have more restrictions than the city code. The governing documents cannot have less restrictions than the city code.

Barbara Holland, certified property manager, broker and supervisory certified association manager, is president and owner of H&L Realty and Management Co. Questions may be sent to the Association Q&A, P.O. Box 7440, Las Vegas, Nev., 89125. Fax is 702-385-3759, email is support@hlrealty.com.