Cover Your Bases
Be aware of the insurance coverage you may need—but probably don’t have.
Insurance is the key to mitigating the impact of unknowns, so it’s critical to understand what coverage you have—and what you might need. Jon Segner, president and CEO of Minneapolis-based Dominium Management Services, suggests doing an annual review of general liability and property and casualty policies to make sure your firm is covered for all circumstances. In addition to the standard property and liability policies, you may want to consider the following types of coverage for your multifamily development.
* Flood insurance. Many property owners in flood-prone areas are required to carry flood insurance. But flash floods—high waters resulting from heavy rains—put even more structures at risk. And most insurance plans don’t cover flash floods. Talk to your agent about the National Flood Insurance Program (www.floodsmart.gov), which offers policies to cover property damage, sandbagging, and clean-up.
* Business interruption. In catastrophic circumstances, such as Hurricane Katrina or the EF5 tornado that leveled 95 percent of Greensburg, Kan., you could be out of operation for a long time. Business interruption insurance provides financial assistance to help pay creditors and cover continuing expenses. This kind of coverage is usually added to an existing policy.
* Ordinance or law coverage. Building codes change, and sometimes your rebuilding efforts may require meeting new standards. This add-on coverage covers the costs of those replacements, which often exceed the replacement costs covered by other policies.
Another example is a proposed bill in the U.S. House of Representatives (HR 4213), which would increase taxes on carried interest (a related bill in the Senate was tabled this summer). “The tax effect of the [House] act is dramatic on investment partnership general partners, including general partners of real estate partnerships that invest in multifamily properties,” explains John Volk, tax partner at accounting and business advisory firm Sensiba San Filippo in the Bay Area.
“For example, the highest tax bracket general partner relative to a 2010 allocation of $200,000 of ‘carried interest’ would have a federal tax liability of $30,000—$40,000 under the higher capital gain rates beginning in 2011,” he notes. “An identical $200,000 allocation in 2011 would result in a federal tax liability of $59,600, not including regular self-employment tax. In 2013, [it] would result in a federal tax liability of $69,400, plus a $5,700 additional Medicare tax on net investment income.”
That’s an additional $1,350 in self-employment taxes (due to upcoming 2013 tax law changes), for a total of $76,450, not including regular self-employment tax.
His counsel? “Build flexibility into new investment partnership agreements and strategize regarding possible approaches for avoiding the use of an investment partnership vehicle,” he says. “Consider adjusting internal models relative to the actual after-tax benefits of particular investments held or to be held by investment partnership vehicles.” It’s also wise to maintain contact with service providers such as accountants, tax attorneys, and others who are on top of the potential implications of such legislation.
3. When Mother Nature Strikes
Mother Nature sure knows how to sneak up on you and pack a wallop. Between 1989 and 2008, the New York-based Insurance Information Institute estimates that hurricanes and tropical storms made up 46.9 percent of total catastrophic losses, followed by tornados (27 percent); winter storms (7.6 percent); earthquakes and other geologic events (5.9 percent); wind/hail/flood (2.9 percent); and fire (2.4 percent).