Banking Hurdles
Despite the insurance costs, some private owners have been active. At press time, Sanders was closing on a property in Florida. How did he do it? By insuring properties on probable maximum loss basis instead of a full replacement basis. By using this method, it may save an apartment owner as much as 75 percent. But they will be getting less insurance.
The question is: Is that elevated insurance necessary? In many cases, geography protects apartment owners from a full loss. That’s why Sanders wonders if it’s necessary to pay on a full replacement basis. “If you’re on the coast in Biloxi, you could have a total loss because you could get hit with a 20-foot wall of water,” he says. “If you’re 20 miles inland, a 20-foot wall of water can’t hit you.”
Self-insurance is also an option. “There are some owners who are self-insuring for certain risks,” Schwartz says. “They’re taking much larger deductibles. You have these layers of coverage above the deductible that certain owners may elect to self-insure for. They can reduce premium costs by doing that.”
But that’s not an option for everyone. Many apartment owners can’t dictate how much insurance they take because their lenders determine the type of insurance required in the loan documents.
“They want to fully insure for full replacement,” Schwartz says. “There are some owners who can do that, but 90 percent of the owners have Fannie Mae or Freddie Mac conduit debt. Those documents don’t permit that type of behavior.”
The key for Sanders in his 600-unit deal was that his lenders and equity sources went along with the plan. Without such consent, it’s difficult to change the insurance coverage for a property. “Wall Street lenders don’t understand yet,” Sanders believes. “That’s what’s slowing it down. Once the rating agencies start allowing them to do it, the flood gates will open again.”
Of course, by the time lenders change their approach, insurance costs may have dropped again–or so multifamily executives are hoping.
“If we go back to a normalized hurricane schedule, do those numbers go down?” Schwartz asks. “No one knows the answer. You’d like to think that the insurance markets will settle, and there are some declining long-term insurance trends in the coastal markets.”
But for that to happen, Mother Nature has to cooperate. And, as apartment owners in Florida and on the Gulf Coast can tell you, that’s one big gamble.
Baron Property Services in Greenwood Village, Colo., bought The Belmont Buckingham Apartments from Belmont/Buckingham of Denver for $13 million. The Belmont Buckingham, built in 1923, was fully occupied and was offering no concessions at the time of the sale. Baron plans to add a modern amenity package to the property. Hendricks and Partners’ Denver office handled the transaction.
Security Properties in Seattle bought the 151-unit Miramonte Apartments in Scottsdale, Ariz., from Legacy Partners in Foster City, Calif., for $16.1 million. Miramonte has one- and two-bedroom apartments with stackable washers and dryers, hardwood-style vinyl flooring and Berber carpeting, brushed nickel hardware, faux granite countertops in kitchens and baths, ceiling fans, private patios and balconies, and wood-burning fireplaces in select units.
Archstone-Smith in Englewood, Colo., bought Jefferson at Bay Meadows, a 575-unit, seven-building community in San Mateo, Calif. for $220.6 million. Archstone funded the acquisition with tax-deferred exchange proceeds from dispositions of other apartment communities. The property, completed in 2003, has several retail shops, including a Starbucks.
Miami-based BHI, a subsidiary of Breakstone Homes, bought Harbour Island Club, a 280-unit property located in Sunrise, Fla., for $30 million. Apartment Realty Advisors represented the seller, M.S.L. Management, in the transaction. ARA says the 99 percent occupancy in the West Central Broward County submarket fueled the demand for the property.
The Housing Authority of Snohomish County in Everett, Wash., bought Olympic View/Sound View in Edmonds, Wash., from Sunset Apartments of Seattle for $8.6 million. The 88-unit community operates under HUD’s Section 8 program for the elderly. Hendricks & Partners negotiated the sale.
GID Investment Advisers, headquartered in Boston, acquired the 331-unit Turtle Creek Villas on behalf of an affiliate, Windsor Realty Fund-V Acquisition. GIS plans to rename the property, located in the Uptown neighborhood of Dallas, to Windsor at Turtle Creek. The property is close to major employers, transportation arteries, DART stations, and the new American Airline Center in Victory Park.
Summit Asset Management in Montgomery, Ala., acquired the Center Ridge Apartments in Duncanville, Texas. The 222-unit apartment community will operate as an affordable-housing community. Summit plans to renovate the property and implement a variety of community-service programs. This is Summit’s sixth acquisition in Texas and its second in the Dallas-Fort Worth area.
Maplebrook Village of Southfield, Mich., has purchased Maplebrook Village, a 455-unit apartment community in Grand Blanc, Mich., for $13.5 million. The Detroit office of Hendricks & Partners negotiated the transaction.
Titan Real Estate Investment Group in Greenville, S.C., in partnership with Cleveland-based Capital Equity Group, bought the Orchard Park Apartments in Greenville from Pasadena, Calif.-based Orchard Park Associates Joint Venture. The 172-unit, 143,708-square-foot multifamily property is currently 98 percent occupied.
–Listings compiled by Les Shaver
Action Items
Three Insurance Strategies
1 – Find well-heeled counterparts. If an apartment owner can partner with other apartment companies on insurance, they can benefit from some economies of scale. “They can spread the risks across that entire portfolio,” says Jay Massirman, vice chairman of CBRE Investment Properties, a broker in Miami.
2 – Take more risks. Apartment owners who think they won’t be hit by a storm are upping their deductibles to reduce their premiums. Still, this may not save a company much. “The deductibles are enormous as it is,” says David Schwartz, managing member of Waterton Associates, an apartment manager based in Chicago.
3 – Skip it. Some firms are taking the ultimate sacrifice when it comes to insurance: going without. “There are some very tough decisions being made right now,” Massirman says. “I have heard of some folks going without insurance.”
