Risk and Reserve
Many condo associations have sizable reserves in low-interest accounts.
This often raises the question whether or not the condo association should invest
its money differently. Nena Groskind of the law firm, Marcus,
Errico, Emmer & Brooks, P.C. looks at this issue from a Massachusetts
perspective. This article is, reprinted with permission. Marcus,
Errico, Emmer & Brooks, P.C. is a medium-sized, full-service law firm
with offices located in Braintree, Massachusetts, a few miles south of Boston.
All of its attorneys are licensed to practice in the Commonwealth of Massachusetts,
and members of the firm are also licensed to practice in New York, New Hampshire,
Vermont, Connecticut, Florida, Rhode Island, and a number of federal courts.
There are no statutory requirements governing the investment of condominium funds, except those imposed by the condominium documents (which typically allow trustees to make any investments they deem "reasonable") and by the "prudent investor rule." Of the two, the prudent investor rule is more crucial and potentially more problematic. On the one hand, that legal principle requires associations to avoid excessive risk, but it also requires them to maximize the earnings on condominium funds. Clearly, trustees would be open to criticism (and possibly to a lawsuit) if they invested all the reserves in pork belly futures, but they also would be subject to challenge if excessive caution produced returns insufficient to keep up with inflation in the cost of condo repairs.
The definition of prudent also creates a wide band of allowable investments, but the context is important. What is "prudent" for a large association with strong reserves may be wildly imprudent for a smaller association, or for one with a much weaker reserve position. For example, consider two condominium managers who invested the reserves of their respective condos in lottery tickets. One of the mangers, who oversaw a large association, purchased about $100 in lottery tickets annually. That was deemed reasonable, because the association was well managed, the reserves were strong, the rest of the portfolio was well diversified by investment type, maturity, and risk, and the $100/year invested in lottery tickets (amounting to approximately $2 per unit owner) didn't put much money at risk.
On the other hand, the manager of a much smaller condo ran into a firestorm after using her association's entire $100,000 in reserves to buy lottery tickets. She didn't draw a winning number (if she had, presumably, unit owners would not have objected to the investment strategy) but she did draw a long prison sentence from a judge who ruled that she was "stealing" the association's money, not investing it.
Obviously, there's a role for common sense here, and, assuming that you are considering investment options other than the lottery, you probably should obtain some professional advice. But many of the basic investment guidelines for individuals apply to condo associations as well, among them:
There are no statutory requirements governing the investment of condominium funds, except those imposed by the condominium documents (which typically allow trustees to make any investments they deem "reasonable") and by the "prudent investor rule." Of the two, the prudent investor rule is more crucial and potentially more problematic. On the one hand, that legal principle requires associations to avoid excessive risk, but it also requires them to maximize the earnings on condominium funds. Clearly, trustees would be open to criticism (and possibly to a lawsuit) if they invested all the reserves in pork belly futures, but they also would be subject to challenge if excessive caution produced returns insufficient to keep up with inflation in the cost of condo repairs.
The definition of prudent also creates a wide band of allowable investments, but the context is important. What is "prudent" for a large association with strong reserves may be wildly imprudent for a smaller association, or for one with a much weaker reserve position. For example, consider two condominium managers who invested the reserves of their respective condos in lottery tickets. One of the mangers, who oversaw a large association, purchased about $100 in lottery tickets annually. That was deemed reasonable, because the association was well managed, the reserves were strong, the rest of the portfolio was well diversified by investment type, maturity, and risk, and the $100/year invested in lottery tickets (amounting to approximately $2 per unit owner) didn't put much money at risk.
On the other hand, the manager of a much smaller condo ran into a firestorm after using her association's entire $100,000 in reserves to buy lottery tickets. She didn't draw a winning number (if she had, presumably, unit owners would not have objected to the investment strategy) but she did draw a long prison sentence from a judge who ruled that she was "stealing" the association's money, not investing it.
Obviously, there's a role for common sense here, and, assuming that you are considering investment options other than the lottery, you probably should obtain some professional advice. But many of the basic investment guidelines for individuals apply to condo associations as well, among them:
- Analyze your investment needs and determine an appropriate level of risk for the association.
- If you are planning to take any risks at all (e.g., if you're contemplating anything other than a savings account) get a written opinion from the association's accountant or attorney verifying that the investment you have selected is reasonable.
- Make sure the minutes of trustee meetings reflect discussions of your investment
