Distressed commercial properties and the risks: a troubled real estate market creates a world of coverage opportunities for those who are willing to think creatively.
This is an edited transcript of the Sept. 14, 2010, "What Insurance Brokers, Realtors and Risk Managers Need to Know About Distressed Commercial Property," webinar hosted by A.M. Best Co. Watch the entire broadcast at http://www.bestreview.com/ webinars/property10/index.html.
U.S. Property Practice Leader
Commerce Cushman & Wakefield
Zurich North American
Real Estate Practice Leader
BANNER: There are two ways you get to become a distressed property. One being that the debt on the existing property is greater than the actual market value today. That puts your property or your asset on a watch list. It's not until an actual notice has been filed, either a notice of default or a notice of sale, when it is strictly categorized as a distressed asset.
KLEIMAN: From the traditional standpoint of what a property and casualty insurer considers to be a distressed property, we think in terms of vacant property moving over into sort of blighted properties with not a lot of hope for a tenant at any time soon. They are going into receivership or being foreclosed on by a bank or new ownership on very short notice.
ELLIS: I would say it's not all about financing. You can have distressed properties whereby you have a real estate concern which has owned locations, not necessarily financed locations, but those locations in and of themselves have become vacant. The tenants have left. They own the building. It's not a financing issue, meaning they're not upside down on their mortgage or they're not defaulting on their mortgage. It's just a matter of the property is now considered vacant. It's also how you define vacancy.
OSTERMILLER: What are you seeing in the marketplace in terms of how commercial property is being insured in terms of policy terms or underwriting?
ELLIS: The coverage we're seeing for distressed properties is not the same as what we see for nondistressed properties. There's a lot more due diligence or stringency around the coverage that carriers are putting onto distressed properties, being that is becoming a larger percentage of an insurer's portfolio in many cases. We've seen various riders put on policies relative to defining what vacancy is and what various methods that the client must undertake to protect those properties from vandalism and/or other liabilities from the standpoint of security around securing the premises.
What we're seeing on the policies themselves is different than a traditional all-risk policy. It's various requirements that an insured must go through to make sure those assets are properly secured, being they're exposed to a much different risk set than are traditional nondistressed assets.
KLEIMAN: It's very specific to each market. Different insurers handle it in different ways.
McDONALD: What would you say about the current insurance market for property in general and distressed in particular?
BANNER: On a commercial multifamily transaction that's been foreclosed on, the situation is the fact that if you have a high vacancy in the property you tend to get high claims for vandalism. That's number one. Two, when we are doing a transaction on a defaulted apartment project with high vacancy, my buyers are going in with a plan in hand, an agenda, that being to reposition a property and to stabilize the property. That's important to the carrier.
McDONALD: What do you tell clients when vacancy becomes a factor? How does that affect insurance coverage?
ELLIS: No one wants to have these distressed assets in their portfolio. We talked about the lenders before. They want to be lending money collateralized with the properties, not taking the properties back as payment for the monies. Most of these situations are fully unexpected. Carriers have become a lot more stringent on the underwriting. They want to make sure that insureds arc paying attention to these assets that are exposed to a bigger set of risks.
BANNER: The biggest issue is the fall below 71%. It's the number I've been repeatedly told here in Las Vegas. Once you fall below that threshold, different covenants of the policy kick in, less water coverage, general liability may increase, deductibles always go up. One of the first bills that a property owner will stop paying is that property insurance bill. That's a sure sign that you have a problem.
OSTERMILLER: Are there insurers who have an appetite for distressed properties? Do they see an opportunity?
ELLIS: Absolutely. I would say out of grim outlooks can come opportunities. By all means, there's actually a fairly robust insurance marketplace out there for distressed properties. The condition of the property is vital when you're looking at providing coverage for these distressed assets.
McDONALD: What's your take on the general market? Is it still possible to get these distressed properties covered?
BANNER: Yes, it is. In my segment of the business we have classes of property. Let's call it Class A, B and C; C being the worst-shape properties. Those are the most difficult to either finance or insure. That's where some of the buyers, the investors, are having to scratch a little harder to find those policies. By the way, they're typically 40% greater than a Class B asset or a Class A asset.
McDONALD: People who are producers--what do they need to know? More importantly, what are the opportunities they might not be aware of?
KLEIMAN: Some of the things they need to look for are potential environmental exposures, previous tenants, looking at the age of the building and what kind of exposure it might have to ordinance, laws, how the codes might have changed. Obviously it's looking at the basic tenancy and what they've got. It's fundamental things but in a lot of cases you don't always have the turnaround time that you'd like with some other traditional classes.
OSTERMILLER: What are the key loss and risk management strategies to implement for vacant property?
KLEIMAN: There are some administrative things you do for free. That's tell the police. Tell the fire department. Forward the mail. Have a property management plan in place so that the proper people have keys to the location. Letting the utility companies know. Letting your neighbors know in the area--to let them know if they see anything that they should be cognizant and they can advise police or fire. Those are just some of the quick things that there's no reason not to do.
Then I would also look at protection systems both from a fire and theft standpoint. Central station burglar alarms are going to be the best. Security services that patrol on a regular basis.
McDONALD: Are there any geographic areas that are more troubling in terms of concerns over vacancies, insurance liability in commercial buildings than others in various states?
ELLIS: I will say that there are certain pockets within the country that are a little bit more problematic. I won't say problematic in that a vacant building per se in let's say California is more risky because it's vacant in California than it would be in let's say Montana. What comes into play is the aggregation exposures around flood, wind and quake. It just happens that many of the high vacancy rates and foreclosure rates are in Florida, Arizona, Nevada, and California; many of these states with earthquake, wind or flood problems. What we're seeing sometimes, is that adds an extra element of complexity to those risks.
Webinar moderators: Lee mcDonald and Marilyn Ostermiller, A.M. Best Co. Communications.
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|Title Annotation:||Property/Casualty: Commercial Property Webinar|
|Date:||Jan 1, 2011|
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