By Craig Finck, CMCA / Published August 2021
Many of us are familiar with the preparations to take when hurricane season approaches. Every year we double-check our hurricane kits and refresh or update our supplies. We might have to fill our generator gas cans or take cash out of the bank to have on hand just in case. If the potential for a disaster is more imminent, we may have to put away the pool furniture or put up the hurricane shutters. For anyone who has lived in Florida for any period of time, these annual responsibilities have become second nature.
For an association board member, you may start with the same level of planning for your association, but that is only the start. Consideration must be given to the ongoing operations and management of the association, regardless of the disaster that may occur. If they weren’t apparent already, the past year and a half of working through a pandemic has taught all businesses where many of their weaknesses lie. Associations have not been immune to these challenges. While this topic reaches into every aspect of operations in an association, this article will focus on some of the financial challenges and address items to consider in order to mitigate those challenges when a disaster occurs.
The most important financial aspect of the operation of an association is maintaining adequate cash flow. It is vital to ensure that residents will continue to have the ability to make their ongoing payments to the association during a disaster and that the association will continue to have the ability to manage those payments. If handling these collections internally, associations must consider alternatives if the current process is interrupted. If payments are being collected in an on-site location or being sent to a specific board member, what would happen if that site was not available or that board member becomes ill or has to evacuate the area? If payments are being collected by a management company, will they have the ability to continue to process those payments if their offices are closed? The time to confirm contingency plans is well before you will need them. Whether handling these collections internally or through a managing agent, having an electronic means to collect these ongoing payments may provide much needed flexibility if the original options aren’t available. If an association is going to have challenges collecting payments, it should be expected that individual owners will have challenges making their payments. Considering where those challenges may come and finding potential solutions, for the benefit of the association and individual owners, will be important.
Almost as important as ensuring the ability to continue collecting owner assessments is the association’s ongoing ability to pay their bills. If you are working with a management company or agent, do they have plans to address potential challenges? If checks are physically signed, will those signers be available when needed? There are a number of different options to initiate, approve, and pay invoices online. Not only do many of these options provide great flexibility and control, but the process can continue to operate through the most challenging of disaster situations. Research the pros and cons of the various options or discuss potential solutions with your management company well before you need them.
Despite the best planning, there will most likely be unforeseen funding needs. Catastrophic insurance deductibles can be substantial, and payouts may be delayed if there are disputes over the details. There may be items that are not covered by insurance. It would be best to begin with a thorough review with your insurance professional to quantify what is and isn’t covered. A professional reserve study is also a great tool to use to help give perspective on some potential funding needs. Once these potential expenditures are identified and quantified, a board will have to decide how best to address any potential shortfalls. One way to address these shortfalls would be to self-insure. Essentially, a board can decide they want to save extra money to cover the potential expenses. Be sure to consult with your management company or accounting professional to determine how to best pursue this potential option.
Some associations decide that the most efficient way to fund for these potential expenses is with a line of credit. Emergency lines of credit can be put in place to provide immediate funding in the case of a disaster, providing an association with a great deal of flexibility at a relatively low up-front cost. Ideally, a line of credit would be put in place well prior to the actual need. Lines are typically for 12–24 month periods, with the ability to renew at the end of the initial term. Upfront costs are relatively low, depending on the amount being borrowed, and renewal costs can be minimal. When borrowed, the association then has some flexibility on how they pay the funds back to the bank. If this seems like a potential option for your association, start a conversation early with a banker who understands the operations of associations. Although overall borrowing rates have been historically low, some credit standards have become more stringent. A preliminary conversation can help the board understand potential challenges with a credit approval and allow for time to overcome those challenges, so a credit line can be in place well prior to the actual need.
Disasters come in many forms. Hurricanes, tornadoes, and flooding can be catastrophic and visibly dramatic, but pandemics aren’t any less catastrophic in terms of their impact on board members, owners, and communities overall. Simple day-to-day processes like signing checks can be blown apart with little fanfare but with a huge impact to an association, their vendors, and ultimately the owners. We can all learn from past challenges to help us better prepare for the future, and planning for ongoing financial operations is an important part of those preparations.
Craig Finck, CMCA
Association Banking Sales Manager, Centennial Bank
Craig Finck, CMCA, has been working with community associations for more than 15 years and is currently working as an association banking sales manager with Centennial Bank. He is also serving on several committees in multiple CAI chapters, and he is a past board member of the Illinois Chapter of CAI. He believes strongly in providing education and resources to association board members and was an eight-year board member of the 2,300 unit homeowners association where he lived in Illinois prior to moving to Florida. Craig can be reached at email@example.com or (941) 451-9617.