Investing of Reserve Funds

Investing of Reserve Funds

Tue, 24 May, 2011 at 11:38
Printer-friendly versionPrinter-friendly version

By: Frank Coleman, Vice President, Wintrust Community Advantage of Barrington Bank and Trust Company, N.A., a WINTRUST Community Bank

The Illinois Condominium Property Act states the following for the purpose of reserving dollars for Capital Replacement/Improvement projects for an Association.

“(765 ILCS 605) (2) All budgets adopted by a board of managers on or after July 1, 1990 shall provide for reasonable reserves for capital expenditures and deferred maintenance for repair or replacement of the common elements. To determine the amount of reserves appropriate for an association, the board of managers shall take into consideration the following: (i) the repair and replacement cost, and the estimated useful life, of the property which the association is obligated to maintain, including but not limited to structural and mechanical components, surfaces of the buildings and common elements, and energy systems and equipment; (ii) the current and anticipated return on investment of association funds; (iii) any independent professional reserve study which the association may obtain; (iv) the financial impact on unit owners, and the market value of the condominium units, of any assessment increase needed to fund reserves; and (v) the ability of the association to obtain financing or refinancing.”

By adhering to the Illinois Condominium Property Act, an Association should conduct a Reserve Study of the property to determine the time frames and dollars required for the replacement/improvement of the Major Common Elements of the Association.    With a capital improvement plan in place, the Association Board will inform the unit owners of the amount of assessment dollars to be collected over time, to be allocated to the Reserve Fund for future projects.

The Board should determine a realistic investment plan for the reserve dollars based upon when the funds will be available for the Capital Projects that have been designated in the Reserve Study.   Board members change due to elections and in order to have a consistent and systematic strategy, a Board should develop an “Investment Policy” that is published for all the current/future Board members to follow and for the unit owners to hold the Board accountable for the investing of funds. 

The three essential objects of an “Investment Policy” for an association should consist of the following.

  • Safety (Is the original investment amount protected/insured.)
  •  Liquid (Can the investment be converted to cash and used for the capital improvement project when needed.  There should be short and long term strategies for investing.)
  • Yield (Maximum earnings on the investment)

In the current financial market, there are not many options to invest funds that earn high interest rates that protect the association funds from losing value.  The safest is FDIC insured CDs or other protected investment instruments.   In today’s investment environment, it is better to be safe in the investment of funds with small gains, then to risk the association funds in an unsecured investment   and risk losing the principal.  

A Board may not be remembered by the unit owners for maximizing the investment and keeping the Reserve Funds safe for the Association’s future projects; however they would be remembered if they made risky investments and lost funds.   Another deterrent for Board Members who invest reserve dollars in risky investments, they may be subject to a lawsuit by the unit owners for not exercising their Fiduciary responsibilities.