One of the key responsibilities of the Asset Manager is to manage the cash and corresponding bank accounts associated with their real estate assets. Since the cash flow performance of an asset is the true scorecard for “for profit” properties, you can understand why this particular responsibility is critical.
It is common for asset managers to supervise properties with hundreds of thousands if not millions of dollars going through the bank accounts every month. However, managing bank accounts with balances in excess of the FDIC insurance limit can pose an agency risk to the asset manager. This is a critical issue considering the current turmoil in the capital markets and instability of many local, regional and even national banks.
The deposits in bank accounts are insured up to $250,000 by the Federal Deposit Insurance Corporation; however, an asset manager should consider the risk associated with account balances in excess of this limit. In response to the perceived risk associated with large bank deposits, the FDIC created theTransaction Account Guarantee Program to give security to depositors who have accounts with transactions in excess of $250,000. Under this program, through December 31, 2009, all non-interest bearing transaction accounts are fully guaranteed by the FDIC for the entire amount of the account regardless of the balance. For example, if you manage a bank account with a balance of $5 million and for some reason the bank fails, then the account is fully covered by the FDIC assuming that your bank carries this program and you have enrolled into the program.
The Transaction Account Guarantee Program is in addition to and separate from the coverage available under the FDIC’s general deposit insurance rules. Not all banks and financial institutions are participating in this program since there are additional costs associated with participation. Furthermore, your bank accounts are not automatically enrolled in the program, thus you will need to have your bank accounts changed for enrollment. The downside is that the deposits do not earn interest, but this is a small price for the safety of having the account fully insured.
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