HOAs Facing Bankruptcy Risks

We’re watching the storms gather around Florida residential property associations – homeowners associations (HOAs), condo management boards – that represent millions of Florida homeowners. One of our clients experienced the impact of Hurricane Idalia that hit the panhandle in 2023. We’ve read the stories about the aftermath. Lots of demand on construction services to rebuild, an alphabet soup of federal and state agencies showing up to triage the situation and a big legal mess to figure out who pays for the rebuild.

In times like these, the quality of the HOA board and the decisions taken in the immediate aftermath of the disaster can have big effects on the underlying valuation of the homes in the location. HOAs are not immune from filing chapter 11. In some instances, a financial reorganization is the clear path forward.

Three Big Hurricane Recovery Decisions for HOAs

The HOA is responsible for managing common or shared property, protecting property values, providing services to residents, and fostering a sense of community through social activities and amenities. When the big storm comes through, the dollars go up and the right decisions are critical:

(1) Pick the right Contractor(s) for Repairs
(2) Navigate your Insurance Carrier’s Solvency Issues
(3) Manage the Reserves, Carefully

The role of a board member in an HOA is crucial, as they are elected to make decisions affecting the community’s operational and financial aspects. Board members serve as fiduciaries, putting the interests of the community above their own and are responsible for budget preparation, reserve funding, assessment collection, and property value protection. When a hurricane hits, everyone is affected and the demand on contractors becomes acute. What might have cost $250,000 to repair in calmer times can easily get to $1mm as pressure mounts to get things repaired/rebuilt and the demand exceeds supply. Occasionally HOA boards hire unscrupulous contractors and reserves can quickly go poof in a scam.

Citizens Property Insurance – Is it Really Solvent?

Insurance is the lynchpin of the property financing world. You can’t get a mortgage for a property that is not insured. You can’t have a beautiful condo facing an unpredictable ocean with everyone having to reach into their bank account to restore the property – one person’s financial insolvency impacts the neighbor’s property value. “Rest assured – our HOA has insurance from Citizens” is what the HOA says when they can’t find another insurer to write the policy. Is this good?

“I think most people know Citizens has not been solvent. If you did have a major hurricane hit with a lot of Citizens property holders, it would not have a lot to pay out.”Governor Ron DeSantis, March 2023

Governor DeSantis’ comments in the aftermath of Hurricane Ian was a moment of candor by state officials who have done little over the past 20 years to mitigate the steady flow of the nation’s largest property insurers leaving the State.

In December, The US Senate Budget Committee launched an investigation into the financial stability of Florida’s state-backed home and property insurance company, Citizens Property Insurance Corporation, as concerns rise over its ability to withstand future disasters. Citizens is an insurer of last resort, covering properties that private insurance companies refuse to insure, and insures approximately 1.3 million policyholders in the state. The committee is particularly concerned about the potential economic consequences of a decline in property values, and the impact on millions of Florida policyholders who could face massive spikes in insurance costs if a major city is hit by a disaster.

What is an HOA Board to Do?

The best course of action is to develop a hurricane disaster financial plan. Similar to having batteries, water, canned food, etc. in preparation for the storm, it makes sense for an HOA board to think through what can go wrong financially in the event of a disaster. Select your contractor ahead of time and add the premium price into the arrangement so a better bidder doesn’t appear with more urgency and more cash. Think through all the assumptions and make sure they are sound – if you are relying on your insurer to pay out – does it have the financial reserves to pay out quickly? If not, the HOA might find itself at the end of a long line of claims that will theoretically be paid by Citizens.

If your HOA is in the unfortunate position of picking up the pieces following some poor board decisions or are simply caught in a series of cascading bad turns, a Chapter 11 bankruptcy filing can be a powerful tool. The bankruptcy courts are typically a very speedy process with business-oriented judges that can quickly get to the key issues. Think of a Chapter 11 judge as a triage doctor – first stabilize the patient and then get it into recovery. Federal bankruptcy judges also have the ability to compel action when chaos reigns in a market.

Call Us for Help

Let us know if Jennis Morse can help in any way; we specialize in Chapter 11 business bankruptcy reorganizations, complex business transactions within debtor and creditor disputes, and commercial litigation. We’ve been through this before and can help.