Capital Reserves Real Estate: Maximize FDIC Insurance Coverage on Committed Capital, Cash Reserves & Deposits

In early 2023, a handful of U.S.-based banks were unable to meet customers’ cash withdrawal demands and went into receivership by the FDIC. In this article, Covercy experts share several strategies for commercial real estate firms to maximize FDIC insurance on their capital reserves real estate, specifically on the banking solutions side. But first, let’s start with the basics.

Note: Covercy is the first investment management platform designed with CRE banking in mind. By integrating robust banking functionality right within the platform, Covercy gives real estate GPs, investors, and deal sponsors the ability to hold committed capital, capital reserves, or other sources of idle cash in FDIC-insured, high-interest-bearing bank accounts — without losing access to cash or tying up funds in inaccessible account types. Schedule your demo today to see how this could work for your real estate firm.

What is the FDIC’s role in banking?

The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the federal government that provides insurance on deposits at banks and savings associations. The purpose of FDIC insurance is to protect depositors in case their bank fails, ensuring that they can get their money back up to a certain amount. 

The current standard FDIC insurance coverage is $250,000 per depositor, per insured bank, for each account ownership category. This means that if you have multiple accounts at the same bank, such as a checking account and a savings account, and they are both in your name, they are insured separately up to $250,000 each. If you have more than $250,000 in one account or across multiple accounts at the same bank, the excess is not insured by the FDIC.

How does FDIC insurance impact commercial real estate? 

Commercial real estate investors and developers often hold large sums of capital in deposit accounts at banks for various purposes, such as to fund property purchases, renovations, or ongoing operations. If these funds exceed the FDIC insurance limit, they are at risk of loss if the bank were to fail.

To mitigate this risk, commercial real estate investors may spread their funds across multiple banks, each up to the $250,000 limit. Alternatively, they may use FDIC-insured certificates of deposit (CDs) or other financial instruments that are structured to maximize FDIC insurance coverage.

In summary, FDIC insurance caps impact commercial real estate by influencing the way investors and developers hold and manage their cash reserves. They need to understand the FDIC insurance coverage limits and consider strategies to protect their funds in case of a bank failure.

Bank Sweeps: A New Way to Maximize FDIC Insurance

Bank sweeps are a common strategy used by investors and depositors to protect their funds held in excess of the FDIC insurance limits. Bank sweeps involve the automatic transfer of funds from one account to another to maximize FDIC insurance coverage.

Here’s how it works: When a depositor has excess funds that exceed the FDIC insurance limit at one bank, the bank sweep program automatically transfers the excess funds to another bank that is FDIC insured. This way, the depositor’s funds are spread across multiple banks, each with FDIC insurance coverage of up to $250,000 per depositor, per account ownership category.

For example, suppose an investor has $1 million in capital reserves held in a single bank account. In this scenario, only the first $250,000 of the investor’s funds would be FDIC-insured, leaving $750,000 at risk if the bank were to fail. However, if the investor uses a bank sweep program, the excess $750,000 would be automatically transferred to other FDIC-insured banks, with each account insured up to $250,000, providing full FDIC insurance coverage for the entire $1 million in cash reserves.

In addition to providing FDIC insurance coverage, bank sweeps can also offer other benefits, such as potentially higher interest rates and increased liquidity. Bank sweep programs are typically offered by banks or brokerage firms, and investors should consult with their financial advisors to determine whether a bank sweep program is appropriate for their needs.

Other Strategies to Protect Capital Reserves Above $250,000

Bank sweep programs are simply one option. Below, we’ve detailed a few other strategies that real estate firms are employing to protect their cash deposits. 

Using different account ownership categories: FDIC insurance coverage is available separately for different types of account ownership categories. By structuring their accounts properly, GPs can maximize their FDIC insurance coverage. For example, a GP with $1 million in capital reserves could hold separate individual accounts of $250,000 each associated with each property or asset. 

Several different types of account ownership categories can be used to maximize FDIC insurance coverage for real estate firms and GPs. These categories are similar to those for consumer banking, but the specific requirements and nuances may differ. Some common business account ownership categories include:

1. Sole proprietorship: This is a business owned by a single individual. The FDIC provides separate insurance coverage for deposits in the name of the individual owner, as well as deposits held in the name of the business.
2. Partnership: A partnership is a business owned by two or more individuals. The FDIC provides separate insurance coverage for deposits held in the name of each partner, as well as deposits held in the name of the partnership. A real estate firm with multiple partners may be able to take advantage of each partner’s FDIC insurance limits.
3. Corporation: A corporation is a legal entity separate from its owners. The FDIC provides separate insurance coverage for deposits held in the name of the corporation, as well as deposits held in the name of each authorized signer.
4. Limited Liability Company (LLC): An LLC is a type of business structure that combines the liability protection of a corporation with the tax benefits of a partnership. The FDIC provides separate insurance coverage for deposits held in the name of the LLC, as well as deposits held in the name of each authorized signer.

Different account categories aside, GPs are also maximizing FDIC insurance coverage where possible by spreading their deposits across multiple banks. For example, a GP with $1 million in capital reserves could open accounts at four different FDIC-insured banks, each with $250,000 in deposits, providing full FDIC insurance coverage for the entire $1 million. 

Risk Diversification in Commercial Real Estate

There are other ways to leverage risk diversification tactics in commercial real estate beyond using FDIC insurance coverage or spreading deposits across multiple banks. Here are some strategies that commercial real estate firms can use to diversify risk:

1. Investing in multiple properties: Instead of putting all their investment capital into a single property, GPs and LPs can spread their investment across multiple properties. This can help mitigate the risk of a single property’s performance affecting its entire investment portfolio.
2. Investing in different locations: Investing in properties across different geographies can help spread the risk of market fluctuations and economic conditions affecting a single area. For example, investing in properties in different states or regions can help mitigate the risk of a single region’s economic downturn impacting the entire portfolio.
3. Investing in different property types: Commercial real estate includes several property types such as office buildings, retail spaces, industrial properties, and multifamily residential properties. By diversifying their investments across different property types, GPs can spread the risk of market downturns or other economic factors that may affect a specific property type.
4. Investing with multiple partners: GPs can also spread their risk by partnering with multiple investors on a single property or across multiple properties. By doing so, they can leverage the experience and expertise of multiple partners while sharing the risk of investment.
5. Using different investment strategies: GPs can also diversify their commercial real estate investments by using different investment strategies, such as value-add, core, or opportunistic strategies. Each strategy has its level of risk and return, and investors can tailor their investments based on their risk tolerance and investment objectives.
6. Investment vehicle diversification: Investing in commercial real estate through different investment vehicles, such as real estate investment trusts (REITs), private equity funds, or direct ownership, can also help spread risk. Each investment vehicle has its unique risks and benefits, so diversifying across different vehicles can help mitigate overall risk.
7. Risk-adjusted return analysis: Before investing in commercial real estate, investors should conduct a risk-adjusted return analysis to determine whether the potential returns justify the risks. This analysis should take into account factors such as the property’s location, tenant mix, lease terms, and overall market conditions.

In summary, commercial real estate investors can leverage risk diversification by investing in multiple properties, different locations, property types, partners, and investment strategies. It is important to note that diversification does not guarantee profits or protect against losses, and investors should always consult with their financial advisor or real estate professional before making any investment decisions.

Investment Strategies by Risk Level 

It is difficult to determine which commercial real estate investment strategy is the least risky, as each strategy has its unique risks and benefits. However, there are some general characteristics of each strategy that may help assess their relative risk levels:

1. Core: Core investments are typically considered the least risky of the three strategies. These investments involve acquiring stabilized properties that generate steady cash flow and are located in established markets. Core properties are often fully leased with long-term tenants, and the investment objective is to generate reliable income with low volatility. However, core properties may also have lower potential returns compared to value-add or opportunistic properties.
2. Value-add: Value-add investments involve acquiring properties that require some level of renovation, repositioning, or leasing to increase their value. These properties may require upgrades to their physical structure, infrastructure, or tenant mix. Value-add properties typically have higher potential returns than core properties, but also higher risks due to the need for renovations and the potential for leasing or market risks.
3. Opportunistic: Opportunistic investments involve acquiring properties in distressed or transitional situations, such as foreclosures, bankruptcies, or properties in emerging markets. These investments typically have the highest potential returns but also the highest risks. The risks can include market volatility, regulatory changes, environmental issues, or other unforeseen challenges.

It is important to note that the risk and return profiles of commercial real estate investments can vary widely depending on the specific property, market, and investment strategy. 

Covercy Helps Real Estate Firms Manage Risk & Diversify Banking Services 

Covercy offers commercial real estate investment firms secure, fee-free banking solutions provided by FDIC-insured banks — with investment management features designed specifically for commercial real estate & real estate asset protection. 

Covercy is the first investment management software for commercial real estate professionals that connects to FDIC-insured partner banks for high-interest earning deposits with total access and liquidity to capital reserves & idle funds for added real estate asset protection, plus the instant creation of checking accounts organized under each real estate asset or property. Try Covercy today with a free trial.