Can a California Homeowner’s Association (“HOA”) invest in mutual funds or other potentially “risky” investments (as opposed to traditional FIDC savings accounts, CD, etc.)?
This appears to be a hot topic right now, given the low/zero interest rates traditional FDIC investments are returning, with HOA Boards, and members alike, eager to get more return on the funds sitting in their accounts.
In a nut shell, it depends greatly on what’s in the HOA’s governing documents (i.e. the CC&Rs), if the HOA is incorporated, if the HOA is a non-profit / tax exempt, if the HOA has an adequate Reserve Study and readily available funds set aside for those expenses, if the governing documents allow for non-FDIC investments, etc., etc. Any investment protocol should be written expressly within the governing documents and strictly followed.
In review of the current “law” on this issue – there does not appear to be anything expressly prohibiting or limiting the types of investments in California, per se. In that regard, an HOA might be able to invest in a mutual fund or other non-FDIC investment, if its governing documents allow, and if the HOA complies with all other funds management requirements (of which there are many).
That said, my strong legal advice (as a litigator who has seen many, many HOA lawsuits), would be to strenuously advise against any non-FDIC investment for any HOA, period. I would strongly advise against any HOA Board purchasing mutual funds or any other non-FDIC investment, period. The reason is simple – potential liability and risk to the HOA itself, as well as to the individual Board members. There are many elements of an HOA Board’s fiduciary duties to its members/residents, including the use of HOA funds, required planning via a Reserve Study, required savings (which must be readily accessible), etc., etc. For example, in addressing money issues, there are two key provisions found in the California Civil Code:
“The board of directors shall not expend funds designated as reserve funds for any purpose other than the repair, restoration, replacement, or maintenance of, or litigation involving the repair, restoration, replacement, or maintenance of, major components that the association is obligated to repair, restore, replace, or maintain and for which the reserve fund was established.” (California Civil Code § 1365.5(c)(1).)
“The board shall exercise prudent fiscal management in maintaining the integrity of the reserve account…” (California Civil Code § 1365.5(c)(2).)
In a hypothetical situation where an HOA Board invests money into a mutual fund, or other non-FDIC investment, and suffers a loss, a member/resident within the HOA could quite easily accuse the Board of breaching their fiduciary and statutory duties to the members/residents and bring a civil action for recovery of the losses. Keep in mind that virtually all civil actions involving breach of the CC&Rs will allow for “prevailing party attorney’s fees.” (California Civil Code § 1354(c).) Thus, even trivial disputes over $1,000 or less, can quickly turn into six-figure disputes when both sides “lawyer up” and start spending money. I have seen expensive lawsuits over trivial issues where the attorney’s fee claims quickly and exponentially become the “meat” of dispute (coupled with the egos that typically cause the dispute in the first place). I can only imagine the type of claims and anger that could befall an HOA Board if it were to suffer a significant loss on a non-FDIC investment. The HOA Board members that authorized the investment could be personally liable for the losses (at the very least, they can be sued… who prevails is of course another matter).
In summary, to the extent any HOA has funds above and beyond those necessary for the reserves, it should examine its monthly dues and perhaps consider reducing the same, prior to seeking to “invest” the money of its residents/members into anything with potential risk. The HOA should consult appropriate tax and legal professionals prior to any such action.
Author Devin R. Lucas is a Real Estate Attorney, Broker and REALTOR®, specializing in Newport Beach, Costa Mesa and Orange County, serving individual, investor and small business interests in real estate. Active with the Newport Beach Association of REALTORS® and Costa Mesa Chamber of Commerce, Devin R. Lucas Real Estate is an independent real estate brokerage and law practice located in Newport Beach, California.
Devin R. Lucas Real Estate
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