Reserve Funds and Reserve Fund Studies
Condo Case - Investing the Reserve Fund
From the Spring 2023 issue of the CCI South Alberta CCI Review
The condominium corporation’s capital property reserve fund is typically the largest asset that the condo board of directors manages besides the actual common property and the equipment managed on behalf of the owners of the corporation. Over 20 pe rcent of condo fees typically fl ow into these reserve funds and interest rates have more than tripled in the past year or so with rising infl ation. Properly investing this money has taken on a new importance to enable the fund to keep up with the cost escalation needed to repair and replace the capital assets of the building complex. However, investing this money can be daunting and I will try to guide you through this.
To avoid having gung ho boards invest in bitcoin or fad and risky investments the Condominium Property Act (CPA) restricts the types of investments that can be made by a condo board. These CPA authorized investments provide a lot of flexibility with a comprehensive array of common and preferred stocks, bonds and other fixed-income securities including guaranteed investment certificates and other securities issued by banks, trust companies, credit unions and other financial institutions. In fact, the list of permitted investments is so comprehensive that many condo owners have further restricted the list of authorized investments in their bylaws to suit a more conservative style of investment. This is to avoid having a Board go into risky high-return strategies where directors bring to the Board their personal “appetite for risk” which is usually not shared by most unit owners. Safety of principal and liquidity requirements of the reserve fund portfolio should take precedence over a high rate of return that ignores safety and liquidity.
In addition to providing a list of approved investments the CPA restricts the percentage of the reserve fund that can be invested in each major category of investment. For those of you who are routinely in the financial markets, this deals with asset allocation and is a means to diversify the investment portfolio. Common share investment may not exceed 15% of the reserve fund portfolio and the value of bonds, debentures and preferred shares cannot exceed 35 per cent of the portfolio at the time of investment. That leaves over 50 per cent of the portfolio for GICs and similar less-risky securities.
Investment Policy and Strategy
Before setting up a reserve fund investment portfolio a condo board should draft and approve an investment policy and strategy. This policy document should start with a paragraph on background referring to the Corporation’s investment bylaw(s) and the CPA and the reason for further restricting investments if they are to be restricted. The document should go on to provide the intent of the investment policy such as security of capital and liquidity of investments taking precedence over return on investment. This can be followed with a paragraph on the investment strategy which may refer to hiring an investment fund manager for the long-term portion of the portfolio and a fund administrator for the GIC condo insider portion of the portfolio implementing, for example, a 5-year laddered investment strategy.
The policy document may then wrap up with a decision-making procedure under which the Board will consider economic conditions, inflation, major uncertainties, needs for liquidity, etc before making a decision on a course of action or strategy. Finally, the document establishes the authorities delegated by the Board to the Treasurer and the Property Manager under this policy.
This article has covered an introduction to the reserve fund and investing the money in it, the CPA legislative backdrop which regulates reserve fund investments and the importance of and some suggested content for a condo corporation investment policy. In the next edition, Part 2 of “Investing the Reserve Fund” will cover some investment strategies and how, practically, to implement your investment policy.
By: Walter Wakula, BComm, MBA, ICD.D
President, Foothills Global Capital Group Inc.
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