When electing to hold any cash to address potential future short-term issues, a corporation is indirectly accepting to forego any potential investment income that could have been generated by the available cash.
When managing reserve funds, property managers will often hold a portion of the reserve fund in cash to be able to quickly respond to any unexpected emergencies. Reserve fund studies will not typically account for the portion of the reserve fund that, in practice, is held in cash. An engineering firm that publishes a reserve fund study will assume that the entire reserve fund will be fully invested every year. While holding a certain amount of cash is a typical practice for most condominiums, the decision to hold cash is often unaccounted for in reserve fund studies and can have some drawbacks.
If you haven't learned about reserve funds yet, read about them here before continuing: 🌐A Strong Foundation: The Crucial Role of the Reserve Fund" Article - Reserve Fund Introduction
The amount of money saved in cash by most boards is arbitrary – people just simply don’t know how much they will need and when they might need it. This unknown causes board members to leave large sums of cash dormant.
In doing this, the future major repair jobs – the elevator, roof, or parking lot replacement – that require investment are being put on the backburner. Instead of planning for expenses that are expected and approaching, many boards are leaving cash for expenses that might never occur. Though being insured against emergencies is prudent, saving too much money in cash can create another emergency.
It may be that the board members are thinking that their un-invested rainy day savings are killing two birds with one stone – ready for potential emergencies, and to cover the major repair work down the road. However, due to inflation, a plan like this may resemble wishful thinking. Even if there’s no emergency bill, there’s a good chance that that entire fund will not be solvent enough to cover the major repair work in the future.
The cost of construction building materials has risen so high that continuing to manage reserve funds this way may require unexpected hikes in owner contributions. Another reason boards tend to save money in cash is because they believe that once they invest it, they cannot withdraw it for emergencies.
One thing here needs to be set straight: if your money is invested – even if all of it is invested – if your condominium requires unexpected servicing, your money can always be made available. The important question to be asking yourself is if your investment is redeemable (cashable) or non-redeemable. If it is redeemable, then you can pull your money out before the maturation period has ended and keep your interest rate in place. If it is non-redeemable, and you decide to pull your money out before the maturation period has ended, this will result in you losing your interest rate.
Because money is available to be withdrawn at all times, it may be more sensible for condominium boards to invest so that the money can mature. At the current rate of inflation, the future bills for repair and replacement work are growing faster than boards and their hired experts are likely to expect.
Few things in life are more vulnerable to change than the value of money. What is perceived as a large sum now will likely not be perceived the same in the future. If you’re trying to ensure that your reserve fund can stay up to speed with inflation and interest, choosing to keep the fund in cash can be risky and your reserve fund might not be healthy enough for the major expenses of the future.
Disclaimer: Please note that any information provided is for educational and informational purposes only and should not be construed as investment advice. It is important to seek professional advice before making any investment decisions.