About a year after his last start-up was sold in 2001, Mike Kowalski left banking to work for a friend’s property management company for a couple of years.
There he came to the conclusion that there is demand for a bank that caters to homeowners’ associations and property management companies.
Mr. Kowalski, who co-founded and later sold two banks in Texas, filed a charter application last month with the state’s Department of Banking for his third start-up, First Associations Bank. Its target market will be homeowners’ associations of condominiums and planned-unit developments across the United States, and it will offer a specialized suite of products and services — such as lockboxes — to help property managers function more efficiently.
New banks “have to find a niche,” Mr. Kowalski, 52, said in an interview this week. “This is just one of many niches that could be established to go after, and that may make more sense than trying to be everything to everyone. I want to be everything to management companies.”
Many banks have targeted specific sectors — such as doctors or professional firms — but First Associations would be one of just a handful, and the first in Texas, to go exclusively after property management companies and homeowners’ associations.
Mr. Kowalski plans to raise between $12 million and $15 million for the bank, which he expects to open early next year.
Several large banking companies, including Banco Popular North America, Wells Fargo & Co., and Colonial BancGroup Inc. have departments that focus on homeowners’ associations.
Colonial significantly beefed up its homeowners’ association business two years ago when it bought PCB Bancorp in Clearwater, Fla. Today the $21.9 billion-asset Montgomery, Ala., company handles processing for 650,000 units in five states using a lockbox system that automates the process of accepting condo dues.
Homeowners’ groups are also good sources of deposits and loans, said Lee Martino, the executive vice president of association services at Colonial.
“This market is continuing to grow,” he said. “Every new subdivision that you see and condominium that goes up needs an association, so there are association deposits available to get, as well as association loans as they age and need repairs and working capital.”
Understanding how homeowners’ associations work and devoting resources to a specialized product line are critical to working in the business, Mr. Martino said.
According to Mr. Kowalski, homeowners’ associations, though generally not well collateralized, operate like miniature rulemaking authorities and taxing authorities. A homeowners’ association that receives a loan has the power to make a special assessment that requires property owners to pay the debt.
If a property owner does not pay dues or the special assessment, the homeowners’ association has the right to foreclose on the property, so the debt is very safe, he said.
“They operate on a cash flow stream,” he said. “Their cash flow is certain. Unlike a commercial entity borrowing against receivables that may or may not be collected, HOAs’ ability to collect assessments is essentially assured.”
Paul Meisler is the president of Pioneer Property Management, manages about 75 homeowners’ associations and several thousand individual properties in Austin. Besides changing light bulbs, making sure the grass is mowed, and seeing that properties are kept up, property management is heavily dependent on accounting, Mr. Meisler said.
Each complex has two deposit accounts, a reserve fund, and an expense account, he said, and each condo in the complexes has an account with the homeowners’ association that shows if payments have been made.
He said he would be interested in a banking relationship that offered more support for his specialized needs.
“If their package of goodies is good enough and pays a good rate of return on savings accounts and saves the HOA or management company money, like anybody with a good marketing game, the plan is going to get attention,” Mr. Meisler said.
For a typical management company not using a lockbox system, each payment envelope must be opened, sorted, entered manually into a bookkeeping system before being taken to the bank to deposit.
Mr. Kowalski said a lockbox system, which automates incoming payments, creates check images, and produces an electronic file that can be imported into software, can save a large management company as many as three employee positions.
Pioneer is using Wells Fargo’s lockbox system, which, according to Mr. Meisler, is reducing some of his company’s workload. Recently more banks have shown interest in handling the deposit accounts for the management company.
A number of banks offer fee-based services to homeowners’ associations, but it is not easy to find banks willing to lend to them, he said. “On the lending side, there is no doubt, only a few banks want to deal with HOAs.”
Mr. Kowalski said that even though his bank will lend to homeowners’ groups, he understands why others might not.
“A lot of banks have a hard time because … [loans] are unsecured,” he said. “It’s no different than why some banks make energy loans. I’ve never made an energy loan, because I don’t know it. This is just another niche.”
