Becoming non-compliant with tax credit rules and regulations is an inherent risk with Low-Income Housing Tax Credits (LIHTC) properties but the risk can be mitigated through an effective combination of insurance and risk management.
It’s commonly understood that if a LIHTC property suffers a casualty, there should be no loss or recapture of tax credits as long as the damaged units are reconstructed within a reasonable period of time. The important considerations that are required to remain compliant are:
1. the damaged units need to be reconstructed and
2. the reconstruction needs to occur within a reasonable period of time.
Having proper oversight of your insurance coverage and claims management process can ensure a successful achievement of both these requirements.
Reviewing your insurance policy to ensure its adequacy will safeguard against the risk of uncovered claims. Remember that insurance policies are contracts that contain many nuances and can make a significant difference in the event of a loss. Often, the premium associated with a policy can be perceived as more important than these coverage nuances since their benefit is not as easily recognized. Uncovered claims is a significant financial burden and will make reconstructing damaged units more challenging. Spend time with your insurance advisor to better understand the details of your insurance coverage to be sure you are adequately covered.
Staying actively involved in the adjusting process of insurance claims delivers a more favorable and expeditious outcome. If requested, carriers will often provide an advanced claim payment to begin making repairs so the units can become occupied more quickly. Adjusters have heavy caseloads so it’s important to stay proactive in following up with them and holding them accountable to keep the adjusting process moving quickly. In addition, having a formal Loss Control and Disaster Recovery program can eliminate or reduce the extent of damage when an incident occurs. Utilizing an insurance advisor to assist in these efforts is extremely beneficial.
Despite all efforts taken to ensure proper oversight of your Insurance Coverage and Claims Management process, the risk of a non-compliant event still exists. Unfortunately, coverage for Loss of Tax Credits is not included in the standard property Insurance policy; however, coverage can be added by endorsement or purchased on a stand-alone policy. This coverage has grown in popularity in recent years and can provide valuable protection to developers, syndicator and investors. Following these suggestions helps ensure compliance with the risks associated with LIHTC properties.
About the Author:
Matthew Harrell, CIC, is Managing Director for Franklin Street's Insurance division. Mr. Harrell oversees Franklin Street's National Accounts team, a dvision dedicated to providing high-level, sophisticated services to property owners, developers and managers from across the country. Mr. Harrell currently manages a portfolio of more than 150,000 apartment units and 20 million square feet of retail, office and industrial space. He is licensed in 45 states and has earned the distinguished Certified Insurance Councelor (CIC) designation.