Michael Shadeed, Director for Franklin Street Insurance Services, is a nationally recognized expert in risk management, service, brokerage placement, and program administration for the commercial real estate industry. He recently answered some frequently asked questions on how specialized insurance services can reduce the inherent risks associated with the affordable housing sector.
1. Are there any unique risks or complex insurance coverage needs that real estate owners, developers, investors and managers should be aware of concerning affordable housing?
Yes, these risks involve Low-Income Housing Tax Credits (LIHTC) first party insurance or tax credit recapture coverage. It provides indemnification for tax credits that are wholly or partially unavailable at the end of the year. Coverage for loss includes interest or penalties assessed by the Internal Revenue Service on recapture amounts. Also, LIHTC Professional Liability Insurance is a stand-alone professional liability policy that responds to the ownership structure of LIHTC real estate developments and provides indemnity coverage for damages the limited partner(s) incurs as a result of an error or omission of a general partner. A standard indemnity and defense policy will offer coverage for third party claims alleging negligence available to all insured partners. Damages could include loss of LIHTC, as well as interest or penalties assessed by the IRS on recapture amounts.
2. What role does risk management play in the success of an affordable housing project?
Due to the high degree of compliance within this space, we view the affordable housing and tax credit industry as an industry vertical that pays a high level of attention to life safety and deferred maintenance issues. Our biggest impact from a risk management standpoint is the relationship with tenants and improved safety at locations.
3. What are some potential underwriting issues that policyholders need to consider when evaluating insurance programs?
First, you should ask whether this carrier specifically accepts your type of affordable or tax credit housing. Many carriers have warranties and exclusions on their policies for a percentage of affordable or tax credit housing per location. The quality of security and attending to a safe tenant base is also a major factor.
4. Share an example of how an affordable housing project can benefit from a custom insurance solution.
We have manuscript coverage within our property policies, specifically written to include coverage or conditions not included in a standard policy. These types of policies cover the loss of tax credits due to a covered cause of loss, as well as the coverage for recaptured tax credits in arrears at the time of assessment. This coverage complies with state laws and allows for the mortgage of the loan plus equity to be insured, above and beyond the replacement cost value of the asset.
5. How can commercial property owners mitigate risks associated with non-compliance of tax credit rules and regulations related to Low-Income Housing Tax Credits?
There is a significant difference between non-compliance to lose tax credits and losing them because your units are not rentable at the beginning of the year when tax credits are assessed. Non-compliance exposure is when your organization is negligent in their professional duties and is an errors and omissions (E&O) insurance exposure. Professional lines insurance coverage is very expensive. You can lose tax credits due to a covered cause of loss, this is covered in the business income and extra expense exposures. We typically use a manuscript policy form that covers this issue for our clients.
Michael Shadeed is a Director for Franklin Street Insurance Services. He can be reached at Michael.Shadeed@franklinst.com.