Community Associations often have significant physical assets that require ongoing maintenance and repair, such as buildings, roads, landscaping, and yes, in 2023, aging infrastructure. To ensure that these assets are maintained in good condition, community associations should perform reserve studies on a regular basis to forecast the expected costs of future repairs and replacements. However, it is also critical for community associations to consider the financial aspect of these assets and how to properly and prudently integrate the reserve study with their reserve investment portfolio.
Integrating reserve study data and investment portfolio planning involves analyzing the expected costs of future repairs and replacements and determining the appropriate level of funding required to meet those costs. While there are many different schools of thought on both subjects, the beginning stages should involve a cash flow analysis. This is a method of evaluating the inflows and outflows of cash within your organization or more specifically the investment portfolio over a specific period.
By integrating the reserve study and the investment portfolio, a community association can achieve several benefits. One of the most significant benefits is the ability to ensure that the association has sufficient funds to cover the expected costs of future repairs and replacements. By performing a cash flow analysis, the association can determine the amount of money that it needs to set aside each year to meet its future obligations.
In addition, integrating a reserve study and investment portfolio can help the association to optimize its investment strategy and subsequently the overall return on investment or ROI. The reserve study (when properly prepared) will provide information about the expected costs of future repairs and replacements, and the investment portfolio can be structured to ensure that it generates the necessary returns to cover those costs. By integrating these two aspects of the association’s financial planning, the association can ensure that its investments are aligned with its long-term financial goals. Please remember that this author’s 40+ years of serving on HOA boards has led to a very conservative position on the type of investments which HOAs should consider for reserve funds. I like to use the term “Cover Your Assets” or simply remind yourself it’s OPM, Other People’s Money.
Another important benefit of cash flow analysis is that it can help the association to identify potential shortfalls in funding by looking towards the future. By forecasting the expected cash inflows and outflows, the association can determine whether it has sufficient funds to cover its future obligations. If there is a shortfall, the association can take steps to address it, such as increasing assessments, reducing expenses or potentially seeking out a loan or line of credit to spread the financial burden out over a reasonable period of time.
Integrating a reserve study and investment portfolio can also help the association to maintain financial stability which in turn may help maintain and enhance property values for its owners. By ensuring that it has sufficient funds to cover future obligations, the association can avoid the risk of financial distress or bankruptcy. This can provide peace of mind for both the association’s board of directors and its members, as they will know that the association is financially secure and able to meet its obligations.
In order to integrate a reserve study and investment portfolio effectively, there are several steps that the association should take. The first step is to perform a thorough reserve study, which should include a detailed analysis of the expected costs of future repairs and replacements. This study should consider the expected lifespan of each asset, as well as any anticipated changes in technology or construction methods that could impact those costs.
Once the reserve study is complete, the association should perform a cash flow analysis to determine the amount of funding that it needs to set aside each year to meet its future obligations. This analysis should take into account the expected inflation rate, as well as any changes in interest rates or investment returns that could impact the association’s investment portfolio.
Based on the results of the reserve study and cash flow analysis, the association should develop an investment strategy that is aligned with its long-term financial goals. This strategy should take into account the expected costs of future repairs and replacements, as well as the association’s risk tolerance and investment objectives.
Finally, the association should regularly review and update its reserve study and investment portfolio to ensure that they remain aligned with its long-term financial goals. This review should include a reassessment of the expected costs of future repairs and replacements, as well as any changes in interest rates or investment returns that could impact the association’s investment portfolio.
In conclusion, integrating a reserve study and investment portfolio can provide significant benefits to community associations. By performing a cash flow analysis, associations can ensure that they have sufficient funds to cover future obligations, optimize their investment strategy, identify potential shortfalls, and provide continuity for the board, management, and the entire community at large.
Helping You Build a Firm Financial Foundation For Your Future
Nico F. March is the Managing Director for The March Group, LLC. He has worked with Community Associations since 1974 and has served on several Boards, including the Board of Directors for the Community Association Institute (CAI), San Diego Chapter. His team has specialized in Corporate Cash and Association Financial Management since 1982 and has assisted over 1000 Associations, Nonprofits and Timeshares invest over $4 Billion in reserve, operating and reconstruction funds. Nico and his team work out of their San Diego and Wyoming offices and may be reached at 888.811.6501 or email [email protected] for further information and consultations.
The March Group is not a tax or legal advisor. We will be glad to work with your professional CPA and Attorney to help you with your financial goals. Neither the information contained herein nor any opinion expressed shall be construed to constitute an offer to sell or a solicitation to buy any securities mentioned herein. Securities offered through LPL Financial, Member FINRA/SIPC.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual or organization.
LPL App 446548-1