By Bryan Farley, Association Reserves - Colorado
Over the last three years, inflation has reached 40-year highs. As a result, board members of homeowners associations have been put in a difficult position when trying to optimize their community’s expenses. Inflation was resulted in the expenses incurred by your property increasing in addition to more expense rates when it is necessary for the community to borrow money from banks.
So, what is the good news?
As of May 2024, the Federal Reserve has set the Federal Fund rate at ~ 5.33% which means a board will finally see some return on interest on their Reserve account. As of May, we are seeing FDIC high yield accounts and 12-Month CDs at over 5%.
What does this mean for your HOA dues?
If your Reserves are sitting in account earning less than 1%, then now is the time to talk to your investment professional and move your monies to an investment vehicle that can help your owners save money.
Based on recent analysis, Association Reserves found that for every point of interest increased, there is an almost 7% decrease, averaged, in the fully funding reserve contribution recommendation. 
For example, let’s assume a Reserve Account currently has $1,000,000 sitting in a 1% interest bearing account, and $20,000 is contributed monthly into the Reserve Account. By moving the monies over to an account that returns 3%, the association may be able to reduce their contribution rate from $20,000 to ~ $17,298!
Why is that? The reason is that the reserve account now earning an additional $20,000 each year (or $1,666 each month) in interest. Remember, as mentioned in the beginning of the article, inflation is still going, so the reserve contributions will still need to be increased each year. Inflation is expected to exceed interest earnings. Boards need to understand that that interest earned will not offset inflation.
The best way to plan for higher costs in the future due to inflation is to:
- Create a multi-year Reserve Funding Plan (one of the three results of every Reserve Study) that provides for the anticipated needs of the association, including the very real effects of interest and inflation.
- Regularly update that Reserve Study.
Boards need to be proactive and talk with their investment professional to take advantage of the current rates. Investment professionals are available to help associations manage their Reserve funds, keeping those funds safe and insured while maximizing interest earnings.
Reserve investment counselors serve as agents of the association, expertly managing and placing the higher returns of commercially available investment vehicles, serving the needs of smaller investors (HOAs are usually too small for the “big institutions” to handle themselves).
In return, those large financial institutions provide an underwriting fee to those investment agents for placing their commercial investment vehicles in the hands of smaller clients the large financial institutions are not equipped to serve. This allows these “niche” investment agents to serve the needs of their client associations at no charge to the association. For the association, the owners receive expert counsel and management plus higher returns, at no cost.
Bryan Farley is the President of Association Reserves, CO and has completed over 3,000 Reserve Studies and earned the Community Associations Institute (CAI) designation of Reserve Specialist (RS #260). His 12+ years of experience includes all types of condominium and homeowners’ associations throughout the United States, ranging from international high-rises to historical monuments.
