4 Financial Strategies for Common Interest Realty Associations Amid Rising Interest Rates
Rising interest rates are bringing both good and bad news for the financial strategies of associations.
The bad news is: If your association is considering a line of credit or other long-term loan commitment to fund improvements to common property, rising rates translate to higher project costs.
The good news is: Most associations have accumulated significant amounts of cash in their reserve funds, which can be invested in interest-bearing instruments to earn additional income.
The opportunity to maximize earnings on relatively safe investments is better than it’s been in almost 20 years. Here’s what associations should know to fully take advantage of this opportunity.
1. Consider Your Investment Policy
The association’s Board of Directors should be reviewing investment policies and making sure financial strategies align with documented guidelines—as well as legal and regulatory requirements.
Deviating from the policy, even if it’s to gain income, could lead you to violate the fiduciary duty or damage relationships with members, which can have lasting negative consequences. If the investment policy doesn’t support the desired strategy, it’s best to make process-abiding, formal revisions that do.
2. Consider Liquidity
The Board of Directors, along with management, should carefully look at expense needs as investment strategies are considered. It’s important to balance taking advantage of investment opportunities with maintaining liquidity. Investing too much of reserve funds could leave the association with unfunded projects or operational issues, so be sure that all investment decisions support both short- and long-term financial goals.
Short-term rates remain more favorable than longer-term rates, which may help your association’s ability to maintain liquidity while also taking advantage of the opportunity to gain interest income.
3. Consider Your Investment Options
Various interest-bearing tools are available, so consider which option is right for your association and your investment policy.
Certificate of deposit (CD) rates and money market rates are better than they have been in years, which makes them a lucrative option. U.S. Treasury Securities could also be a beneficial option to consider because their attainable yields are often better than CD and money market rates.
4. Consider Your Tax Planning
Earning interest on operating and reserve funds comes with its own tax planning implications.
Many associations have not had a net taxable income in recent years because they’ve been able to allocate reasonable administrative expenses against that interest.
Now, with higher interest earning potential, more and more associations could be facing a tax liability.
Remember, interest earned on all bank accounts and investments is still subject to tax, regardless of whether they are in the reserve fund or not. This is true whether you are filing an 1120-H or an 1120. So, it makes sense to look at your cash flow needs and do some tax planning with your advisor to help eliminate any surprises next April.
Learn More about Financial Strategies for Your Association
Rising interest rates may not be desirable for a loan commitment, but they do bring about other opportunities that may be able to be leveraged for the association’s advantage. However, it’s always essential to stay true to your ultimate financial goals, risk appetite, investment policy and liquidity needs for an investment to truly be a fit.
If you’d like to learn more about ensuring financial compliance or making strategic decisions for your condominium association, reach out to your Warren Averett advisor directly, or ask a member of our team to reach out to you.
