In recent years, the importance of accumulating reserves has dawned on many HOA Boards and Managers. Proper reserve planning drives an HOA's ability to adequately care for assets by having both the funds and a maintenance schedule to follow. A well executed reserve study calls for a funding plan that systematically grows reserves to address future repairs and replacements without the need for special assessments.

As a rule of thumb, the average garden variety condominium should have around $3000-$6000 per unit in reserves, depending on amenities. There are many HOAs that should have much more than that because of deferred maintenance or extensive common elements. Even the most modest properties should have tens of thousands of dollars socked away in reserves. Larger, more complex properties should accumulate reserves in the millions. To truly know what level of reserves applies, a reserve study must be performed by an experienced and qualified reserve analyst. (See www.apra-usa.com for a list.)

As reserve funds grow, it's extremely important that the Board have an investment plan. Wisely investing reserves can reduce owner contributions by thousands of dollars over time. While your friendly banker always has some investment options available, the Board should explore other options for higher yielding instruments. (See www.bankrate.com for options in your location.)

Because of fiduciary concerns, the Board should usually only invest in guaranteed and insured investments unless the membership votes to be more aggressive. In either case, there should be a clear and written investment policy for the Board to follow.

A word about depositor insurance. FDIC Insurance is limited to $100,000. But some banks catering to homeowner association business have additional private depositor insurance that protects a much larger amount of HOA funds. While this addresses the depositor insurance question, the Board still needs to consider whether the bank offers the best rates.

One of the greatest pitfalls of reserve fund investment is losing track of yield because it's out of sight, out of mind. Interest yields ebb and flow. Currently, savings and money market rates have fallen to historic lows. But that will change at some point so having a reliable investment tracking system is important to ensure that the return on reserves stays as high as possible without risking principal. There are free online investment portfolio trackers available at www.fool.com and www.morningstar.com for those that like to self manage. Or, if your HOA has been blessed with substantial reserves, hiring a financial advisor to track investments and advise the Board makes sense.

If your homeowner association's reserve fund and investment plan have been out of sight, it time to expose them to the light. Growing reserves mean good stewardship and is one of the Board's highest callings.

Published: June 16, 2004

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Richard Thompson owns Regenesis, a management consulting company that specializes in condominium and homeowner associations. He is a nationally recognized expert on HOA management issues. Regenesis publishes The Regenesis Report, a monthly newsletter for HOA boards, developers and managers. To subscribe, go to Regenesis.net. He can be contacted by email at .