A lot of us feel like everyday life keeps getting more and more complicated, and finances are no exception. In New England, there are strict limitations to what boards can do with their association’s funds, but that doesn’t mean there aren’t plenty of options. Both smaller and large associations have their respective obstacles to overcome when it comes to managing money, whether it’s figuring out how to battle outstanding assessments, or knowing how to navigate the payment of a loan. The bottom line is that administrators need to have at least a passing familiarity with their community's banking practices, and know how to keep their operating funds both safe and accessible, while taking care of their reserve and operating funds.

Types of Accounts

As topics of conversation go, the finances of homeowner associations are not very sexy. In fact, the bank statements of a condo or HOA building in New England is probably among the most conservative investment plans one can come across. Associations often have quite a bit of money to invest, but the limits with what they can do it means that there aren't a whole lot in the financial industry made especially for the industry. “Based on my experience,” says Kokalari, a senior financial advisor for Merrill Lynch, “commercial banks typically have account representatives who service operating accounts for managing agents and who are familiar with the day-to-day transactional banking needs related to managing co-ops and condos.” However, he says, “As far as managing reserve investment accounts are concerned, to my knowledge, there’s not a wide field of people or institutions who are set up to specifically service these types of accounts.”

Maybe someone in your building is a master venture capitalist or investment banker, and brags about consistently getting those big returns without much risk. It’s especially enticing because interest rates remain in the basement, and those returns on bank statements will be next to nothing. But, most boards are hopefully well aware that they have very strict limitations on how they can invest the collective funds of their associations. “These days, it's pretty much cash money market accounts, and the most aggressive thing I see on a regular basis is a [certificates of deposit] account,” says Chad Clark, CPA at Roselli, Clark & Associates in Woburn, Massachusetts. “I do have a couple out there that are still in investments, but a lot of them took some hits, and even lost some principal, which as a fiduciary board member, is not a great idea to have that work out,” he says.

But that's not to say that having financially astute members in your association is not a boon. “Because boards are so much more sophisticated than they were ten years ago, the people that are now buying the units—living in the associations and on the board—they get it. The condominium, which used to be affordable, now it's more living style that's the drawing card, and you've got very astute people with good finance acumen,” says Mark Love, CPA at Love, Jarominsky, & Raymond LLC, based in Worcester, Massachusetts.

Still, the most important responsibility of a board member is not to lose any of the association's money, no matter how talented a stock market trader. While there are no strict, legal restrictions on how boards can invest their association's money, they will always be accountable to the responsibilities of a fiduciary. If a board members do lose principal in an investment, there's definitely grounds for a lawsuit

To keep things conservative and simple, the basic operating checking account is essentially what you pay your bills with on a monthly basis. “Generally, the operating money goes through a checking account, which is where the condo fees get deposited, and the vendors get paid out of. If some associations have excess operating funds, they might open up a money market account, just earn a little bit of interest. But, for the most part, the assumption is that the operating fund is not going to maintain a large surplus,” says Clark.

The second basic component of any association’s finances in the savings account for reserve funds. Here there are a few more options available, but still not much. “Occasionally, boards take that a step further, where they are actually taking some of the money in the reserve fund, and get a better return on it, and place it with an investment broker, which is a third bucket. Still, it's abundantly conservative,” says Love.

While often property management companies will utilize their own operating accounts for the associations they service, boards have more autonomy and potential shopping to do with reserve accounts. “A lot of them now are investing in [certificates of deposit account registry service,]” commonly referred to as CDARS, says Clark. “They're like brokerage investment accounts, but all they really invest in are marketable CDs at various banks across the country. Basically, the brokerage shops out their money and finds them the best rates, instead of just trying to go to your local bank in your town,” he says.

In order to make sure all funds are federally insured, boards might have to get savvy about opening multiple accounts, they're working with a very big budget. “CDs are FDIC-insured, with the cap right now $250,00 per bank. If a condo has $1 million in reserves, they'll go out and maybe get five CDs at $200,000 each at different banks. That's how you're protecting the money in case of any bank failures,” says Clark. Clark adds that some local banks that do not operate across state lines, often are able to provide insurance guarantees to money over $250,000 through state programs.

While reserve funds are restricted for capital items or other items that the board deems necessary, sometimes unused money can later be moved into your operating fund or a money-making account; and an escrow account, often for security-deposit money that you’re holding for a few months for new residents. The “extra money” account often can be found in gas-heated buildings after mild winters, when the building spends less than it had budgeted for. These are commonly called contingency funds. “To be honest, I'm not a big fan of them. People seem really confused as to what it's purpose is, when to use it. If they do use it are they on the hook to replenish it? You can accomplish the same thing with good money management by just using an operating fund,” says Clark.

What factors enter into where a condo decides to conduct its financial business? By the accounts of all concerned, business relationships and referrals from others are key. Sometimes it’s the property manager who recommends a bank he knows, other times it’s one of the board members knows of a bank with a good record or does some research on financial institutions. “The fact that they've been able to demonstrate to banks that they run like small businesses, it's a whole new market for banks. So, they don't have a condo product, but internally they may have a particular way to get a loan through the loan committee to the HOA. They're well-run, they're well managed, and they've got assets,” says Love.

If an association has a loan with a bank, that will often play a defining role in where they also choose to invest their money. “Associations are going to go to their local bank 99% of the time. They're going to have it with the bank that they have the loan with, and 99% that's going to be one of the requirements of the lending bank,” says Love.

Becoming Creative

Co-ops and condos have to do their due diligence to find out whether institutions and/or products are financially stable. There have been a few cases in which boards have bought annuities sold through banks even though they weren’t insured. Some packages are sold through the bank, but they’re really not part of the bank. CDs seem to be a good choice for developments, at least according to many of those interviewed for this article. Some experts also favor treasury bills, but others avoid them because of their low interest rates. Love says, they have still have some popularity with associations because the interest on treasury bills are tax-free, unlike commercial bank accounts.

With all of these complications, do banks have experts on staff who specialize in the particular concerns of co-op and condo buildings? There are several answers to this question, representing several different viewpoints. There are such in-bank experts, but they typically tend to work with property management firms. Kokalari, representing Merrill Lynch, says, “In addition to the monthly statement, at Merrill Lynch we have the ability to provide customized interim reports that provide further insight into the status of a reserve portfolio, such as the maturity schedule of CD holdings. This can be very helpful to boards that are trying to determine funding schedules for capital expenditure projects and can also facilitate the investment decision-making process.” Many local banks and brokerage firms offer similar services.

Efficiency & Transparency

How can buildings make their financial business more efficient—­­especially to make them run more transparently for unit owners and to make them less prone to mismanagement or fraud?

In general, buildings should have their accounts accessible by the board, not only the managing agent. Most buildings have a treasurer who has some expertise in financial matters, and some larger co-ops and condos have an entire finance committee. Someone from the board should look at bills, look at the monthly reports, and establish limits on payments. And of course The board or management should have a professional auditor examine the books at least once a year. “If associations have more than 50 units, they need a CPA to come visit them once a year, as a minimum get a review. They could maybe opt for a variety of reasons, to get an audit. It could be in the documents, a change of officers, or the bank that lent them money has required an audit,” says Love.

Most accountants say that at least two people should be required to sign off on withdrawals that entail any amount of money over a certain amount. In many cases, two people should be required to sign checks—sometimes a board member and the manager, sometimes the president and the treasurer. If your association doesn't have someone on board that knows their finances, then the board should do everything they can to find out more, whether it's from a CPA, from the CAI website, or from this newspaper. A lot of things can go wrong in a condominium community, but finances are among the ones with the least margin of error.    

Raanan Geberer is a freelance writer and a frequent contributor to New England Condominium.