By Tom Engblom, AMS, ARM, CMCA, CPM, PCAM
Approximately four years ago, when I left as a Property Manager, I thought I knew every aspect of property management known to the industry until a prospective client for banking requested a certificate of deposit ladder.
Initially, I wanted to respond with a 6 or 12 foot ladder, but upon reviewing Webster’s dictionary a ladder is “a rising series of steps, stages or levels” or a conduit to structure association investments to mature in successive periods. Have I caught your attention?
Nevertheless, before investments are initiated a strategy on policies, protocols or programs must be set by the board of directors to maintain their fiduciary responsibility to the association. The investment program should encompass a three-pronged approach that consists of safety, liquidity and yield.
Safety is a measurement by which the anticipated income from the investment will mature into the amount calculated within the period intended (3 month certificate maturing at 90 days). Liquidity merely means the investments can be converted to cash quickly for emergencies with shorter term certificate of deposits or money market funds at your disposal. Lastly, yield is the rate of return on the investment ($50,000 at 3 percent for the year would yield $1,500 divided by 360 days for a monumental $4.16 per day income.
Visualize the investment ladder for the association as the concept that allows the association investment portfolio to provide above-average yields but still maintain safety or liquidity. In Tom’s terms accessing the funds periodically while still earning a respectable interest for capital projects as needed.
A CD ladder is a unique concept to maximize interest and maintain liquidity as follows:
- Association has $60,000 in reserves.
- Purchase 12 certificates at $5,000 each; therefore every month a certificate matures for the remaining year, or $5,000 monthly.
- All 12 certificates earn the higher rate of interest offered and as the certificates mature monthly the certificates are available for use or reinvested with additional funds — thereby creating the required safety, liquidity and yield required to maintain the fiduciary responsibility to the association, typically within the FDIC limits of the financial institution.
By implementing a laddered portfolio with investments for the association that
mature in successive months the association will achieve the following strategies: higher total rate of return, maintenance of liquidity through short-term holdings and flexibility to reassign short-term investments to longer-term investments when interest rates are up.
The aforementioned information is provided for clarification to properly invest association funds. If the board is unclear on how to proceed, contact your professional manager, accountant or banker. If the aforementioned professionals are not used by your association, contact the Community Associations Institute because its banking acumen is overwhelming!
Tom Engblom is a licensed instructor in Illinois for Real Estate for the past 22 years and National instructor for CAI. He has managed a minimum of 2,500 units within the suburbs and Chicago for 20 years.