We are in an age of dramatically more devastating natural events: frequent and expansive wild fires, intense hurricanes, stronger tornadoes and historic rains/snowfall resulting in record flooding. As never before, establishing catastrophe planning strategies supported by adequate insurance coverage is a critical element to restoring the facilities impacted.
There is a banking program specific to community associations that is particularly valuable for the environmental changes being experienced. The program has traditionally been referred to as a “Standby Line of Credit for Named Storm Damage”. The reason such a bank facility becomes valuable has largely to do with expediency and unforeseen dilemmas with insurance coverage. The general description of such a program is that it is an existing availability of cash specific to the occurrence of a particular catastrophe. The funds may be needed to protect damaged property from further deterioration, restore the property while waiting for insurance proceeds or to restore uninsured portions of a property. For instance, many communities have landscaping and ground cover features worth thousands if not millions that are not insurable. There may be unanticipated loopholes in coverage such as damage to a swimming pool from a flood not being covered.
An emergency Line of credit for named storm damage typically is structured as follows. The association applies with a community association specialized bank. The loan amount is determined based on what level of restoration the association may want to accomplish in an immediate time period versus waiting for insurance proceeds. For instance, NOAA identifies the East Coast hurricane season as being from June through November. Consequently, a bank would establish an annually renewable line of credit for the time period of May 1st through April 30th. This allows for a community association to experience the catastrophe, draw on the credit line and hopefully have enough time to repay the amount advanced before the next hurricane season starts. A properly structured credit facility will have a term loan function built into the loan documents. Meaning, if the credit line is not paid off by the April 30th expiration date of the credit line, the principal amount outstanding will automatically convert to being an amortizing transaction. The term of this amortization period may be 3, 5, or 7 years. It is likely that if such a conversion occurs, the renewal of the credit line may not occur. Although this is the traditional product structure based on Named Storm Damage, the concept can be adjusted to accommodate regions susceptible to wild fires, flooding or tornadoes.
Approval for such a bank program may have some unique credit review criteria. As insurance coverage is the anticipated appropriate payout resource, a bank may require review of the Association’s insurance coverage by a licensed public insurance adjusted to be sure the property is adequately covered. It is likely the association will need to have reserve balances that are sufficient to support the level of insurance policy deductibles. Other standard community association loan approval criteria will likely apply: delinquency level within an appropriate range; investor/owner ratio with an appropriate range; collateral being a first position assignment of assessments.