The insurance industry is often so spread out to a variety of different niches that it has become difficult for investors to find the total protection they need. Providing a solution to this issue is Bryan Shimeall of Multifamily Risk Advisors. MRA are the experts when it comes to the apartment and multifamily industry. As a member, Bryan shares what you need to know about insurance in this particular niche, giving us a peek on what they do, how they support their clients, and what their partnership looks like. Looking deeper into the industry, Bryan tackles the problem experienced by habitational insurance, how it is affecting underwriting deals, and more. Find more helpful nuggets of wisdom about the insurance industry and the checklist you need to cover to avoid killing deals.
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Multifamily Insurance Industry: Finding The Total Protection You Need with Bryan Shimeall
Our guest is Bryan Shimeall. Thanks for being on the show, Bryan.
Thanks for having me.
I’m excited to have him on the show. He’s somebody that you definitely need on our team. I’m sure many of the audience does as well. He is with Multifamily Risk Advisors, also known as MRA. It provides insurance and risk services for apartment investors, managers and developers. As one of the few multifamily-specific insurance specialists in the country, MRA understands the mechanics of the industry and support their clients in a variety of ways that are unique to the industry. Their service platform allows MRA to operate as an outsourced risk manager and a true partner focused on mitigating risk while reducing per door costs.
Over many years, they have gained an in-depth understanding of the apartment industry and its needs. As such, they have developed numerous innovative solutions to meet those needs by leveraging relationships throughout the insurance world. They excel in the proper placement of resources, products and services while supporting the overall growth of a portfolio. Bryan, I know you have so much value you’re going to provide to our audience. What you do is important to us as syndicators as we’re buying these large assets and properties. Give them a little more about what your focus is and let’s dive right into the type of industry that you’re in and how you help us.
It’s no secret the scope of the insurance industry and how large it is. An unfortunate aspect of our industry is that there are many insurance people that specialize in a variety of different niches or don’t specialize but work in a variety of different niches. It’s not allowing people to become experts in any one industry. As an agency, that’s what we’re focused on. Multifamily Risk Advisors is focusing on the apartment industry. As such, we’ve been able to design a service platform that helps people get deals done, helps people grow portfolio because insurance is not anybody’s favorite topic. Quite frankly, this would come in one of the more difficult aspects of putting a deal together. We’re able to align ourselves with the client. We like to operate as true partners. I know that’s an overused term. We try to work towards a partnership with our clients where they have the confidence in us to know when it comes time to ensure that asset that we’re going to make sure it’s insured properly. We’re not going to be the impediment to a deal getting done.
Who is your typical client?
We span the gamut with it. We have some clients that have a portfolio as large as 30,000, 40,000 units. I have clients the way down that might have 500, 600 units somewhere in that range. We do span the gamut in terms of size of the portfolio. We work on a national basis from coast-to-coast. I’m doing a ton of work in Texas and California, even though I’m based here in Florida where a large percentage of my clients are. We pretty much work on a national basis. Many apartment operators don’t have assets in one part of the country. We’ve pretty much span coast-to-coast in terms of our expertise and experience.
I’d like to dive in a little bit about how you support your clients, what that partnership or relationship looks like. You had mentioned the unique ways that you help support clients. What does this relationship look like? When should I be contacting somebody like yourself? Let’s go through that process a little bit.
It usually starts in two scenarios. The first scenario, maybe they’re unhappy with their current service level and obviously, we would position how we could address service issues in the client I have. Most often it starts with the acquisition of the first asset. If somebody’s looking at a property somewhere, they need to ensure that property. One way or the other, they get introduced to Multifamily Risk Advisors. We come in and help them get from time. They enter their due diligence all the way to the closing on a property. If you look at what’s going on in the market place, habitational insurance is in a difficult spot. It hasn’t been in for a lot of years. It’s the first of the year the market has been undergoing a significant hardening of the market, where rates are going up, coverage is going down. Carriers are being picky. It’s a difficult market. We see many of our clients they might grab the seller’s O&M, take a look at their insurance number and that becomes their number for underwriting.
In this market, that is definitely not what you should be doing. There are some people that are getting some significant increases. Having your coverage conformed to lender guidelines, especially Fannie or Freddie guidelines are becoming more and more of an issue, especially with regards to things like roof ages, wiring and things along those lines. When it starts from an acquisition standpoint, we come in and prove our worth how we become part almost of the underwriting or due diligence team that helps get that closing over the goal line.
[bctt tweet=”Looking at insurance is to understand your financial exposure.” via=”no”]
What is habitational insurance?
If you look at apartments in general, anything residential, you could be talking about a senior, student, whatever it might be. If it’s a type of property that people inhabit, that marketplace has been undergoing tremendous hardening meaning rates are going up in that area. The big question is what is that attributed to? When you look at your apartment coverages, there are three primary coverages that are in place on almost every property. There’s the property insurance, which covers the asset itself. There’s the liability portion, which covers things like slips, falls and such that you might be sued for.
There’s usually an excess liability layer that sits atop that general liability should you have a bad claim that exhausts the limits of the primary general liability policy. In almost every property, you’re going to have those three coverages. Obviously, there are others such as flood and things like that. It could be in place in the property. Those are the three core coverages that are in place. With regards to why is habitational becoming so much more difficult, it’s due to the claims that have taken place. Don’t hold me to the exact numbers but in general, the industry as a whole expects about $40 billion in losses on a year-to-year basis. In 2017, the numbers that I’ve heard was the industry took $170 billion in losses. In 2018, it might sound far better than $170 billion, but the industry still took $80 billion in losses, which is twice what they were expecting. As a result, the marketplace adjusts rates. They adjust coverages to try to figure out some way, some path to profitability.
If you compare this market to what’s been occurring for a good few years prior to this, the market has been solid. Rates are falling. Everybody sees their renewals go down. I’m in some situation where you need to get some concession from the carrier. The chances are you could probably get that done if it was reasonable. We’re finding ourselves in a much different spot, but it’s all coming from losses that occurred, catastrophic losses, hail losses across the Midwest. The Midwest keeps getting hammered time and time again with hail. It’s all attributed to losses.
One of my questions are going to be different types of insurance that we need to be thinking about, but it depends on the location. What’s been happening there over the last many years and how is that going to affect how we’re even underwriting deals? Hopefully, we’re going to contact somebody like yourself. We’re going to get an estimate to make sure we’re underwriting properly. We’ve had insurance change on a deal drastically from the time we’ve got an estimate to the time we close. It changes things a lot. Elaborate on that process when we get that estimate, how solid is that and what do we need to be thinking about when we get that?
How solid and how accurate it is dependent upon who you’re working with. Are they spit-balling some estimate that they hope in the ballpark or are they collecting the information on the frontend? They need to give you an accurate estimate. Obviously, we understand when your money goes hard in a deal, your purchase on the estimate that we’re giving you. How accurate that our estimates need to be? To get an accurate estimate, you need quality information on the building. What square footages are we dealing with? When was it built? What was the wiring? If there’s one thing that the audience takes away from this show, it would be to understand your roof ages. This is an interesting point that many people are missing. It gets a little bit technical. I would love to delve down into what’s going on with roofs right now and why it’s important to get the seller or somebody to be able to tell you exactly how old these roofs.
If you look at property insurance, insuring the asset itself, there are a couple of different valuation clauses that will be used. Replacement costs, meaning depreciation is not factored into any claim payment or actual cash value, which means the depreciation is. In this market, if the roofs on a building are older than twelve or fifteen years old, it depends upon the carrier. Most carriers are only going to cover it from an actual cash value basis, meaning depreciation has factored in. If you have a twenty-year roof, there’s a claim. The adjuster is going to come in and the adjuster is going to adjust the client payment assuming that there’s not much life left in these roofs. The real problem comes in to a lot of your lending requirements, especially with Fannie and Freddie, because Fannie and Freddie will not accept actual cash value clause on a property insurance policy.
Having somebody tell you the approximate age of a roof for something could get you into a lot of problems when you’re ready to sit down at the closing table. We had this issue, we were told the age of the roofs all the way across the board. We put the coverage in place. Lo and behold, the lender comes with a PCA that stated they weren’t insured. The PCA stated that they thought the roofs were close to twenty years old. It conflicted with the information we had, but the lender was going to go off of their property condition report at which point they saw that the roofs would be valued on an actual cash value basis. It almost costs closing. We were able to get it over the goal line with our clients, but it was many phone calls and a lot of doing to get that done.
Elaborate on how we determine the exact age so we know that before we get too deep.
If your seller can give you any contracts like, “Eight years ago, here’s our contract to have all the roofs replaced,” and that usually suffices. Oftentimes, they don’t have that. It depends upon the municipality. If you’re able to go to the building department, pull a permit that shows when they’ve got done, that’s definitive information. Oftentimes, people want to send a roofer up there to tell them the age of the roof. To be honest with you, most roofers don’t want to come up and sign their name on the dotted line and say that this roof was placed in 2008. They’re never that specific. They say something like, “Ten years ago or approximately twelve years ago.” Oftentimes, that doesn’t work for the lenders. I would say having the seller supply you with something initially would be important. The next step would be to get a building permit data from that. Beyond that, you might have to bring in an engineer who gives an idea on the age of roofs.
I appreciate those steps too. That gives us some good things we can do to determine the age of this roof because it sounds like it’s a big deal that we know that. Ahead of time, we’re not getting at the closing table and figuring out, “What happened here?”
You’ve conversed this. Remember how I’ve talked about a hard market versus a soft market. A few years ago, a carrier might have been willing to cover a twenty-year-old roof but in this market, they’re pretty much bound by twelve to fifteen years. It’s a take it or leave-it-type of situation. If you can find a carrier willing to accommodate something older than that, they’re often willing to but at a significantly higher price or significantly higher rate, which that alone sometimes might kill the deal.
From your experience, what are some other examples of things that killed a deal that we wouldn’t normally expect? From your experience, it didn’t happen because of this.
I would say a couple of things. I would focus on the loss history of a property and the wiring of a property. Let’s look at wiring first. If the property was built prior to 1973, there’s a very good chance that it has aluminum wiring and carriers can get sticky on that. Some carriers will not accept aluminum wiring. Usually, the aluminum wiring has been remediated in some way. This again goes back to some information that the seller needs to provide you. Asking them, “Has the aluminum been remediated?” Hearing, “Yes, it has,” oftentimes does not suffice it. It might get you through closing, but you might find out after closing after the carrier inspects that it hasn’t been remediated. Now you’re in the position of having to remediate it.
I would hark to always ask the seller. If he says it’s been remediated to provide you a proof of how it’s been remediated. If they can’t do that, you probably need to hire an electrician to go in there, to inspect it and to give you a statement on not only has it been remediated, but how has it been remediated. There are a couple of different technologies that can be used to remediate aluminum. It’s important to know what those technologies are because each carrier can vary a bit. I would focus a lot on wiring. The other one is on losses. The insurance industry looks in the past to project what their rights will be into the future. If you’re acquiring property and that property has been subject to $1 million or $2 million worth of losses over the last couple of years, you’re going to be paying inflated premiums on the losses that the seller had for that property. What would be part of my due diligence if I was acquiring an apartment complex? It would be the losses. If it’s an older pre-1973, I would ask for how the aluminum wiring, if it’s there, has been addressed and obviously the roof ages, which we talked about. Those are the three very important underwriting factors.
Is there any reason why the seller would not want to provide you that proof that the aluminum wiring has been remediated?
Oftentimes, I see situations where sellers aren’t willing to provide information for whatever reason. I can’t speak to why that’s the case. Some sellers that have been through it, they understand, they present that stuff, they understand there’s no way around it. You have other sellers that are like, “You go find that information out on your own.” I can’t speak to why they would do that but some do, some don’t. It depends. I oftentimes have sellers simply say, “They’re not releasing loss information.” That’s great, but to buy the asset we need insurance and to get a quote, we need losses. It’s going to be addressed in some way.
I’ve never bought a building with aluminum wiring. I was wondering about that. It seems like if they go to that much trouble and they’re trying to sell it, that they would want to provide that to you to show that it’s been done. Any other ways that you use anything randomly that kills a deal? Maybe it doesn’t often happen like aluminum wiring or roofs or that type of thing. Anything else that we need to be watching out for when it comes to insurance?
In general, I would say you either can look at it from an asset standpoint or from a portfolio standpoint if you have multiple properties. From the asset standpoint, I would pay a whole lot of attention to where that asset is located. If you look at an asset that you’re acquiring in Florida here where I’m based, you’re going to have a variety of catastrophic wind coverages that few agents that don’t work in wind areas understand those and how subtle little terms that sound innocuous. They would have no real bearing, have huge financial implications should there be a loss come forth. I always try to coach my clients when we’re looking at their insurance is to understand what their financial exposure is.
When I have clients that their only goal of having insurance is to appease the lenders. Those are the ones that are usually the most exposed. I have other clients that want to understand every single term that they need to so they can assess what their financial exposure might be during a client. I’ll give you a perfect example. You take a 3% or 5% when deductible, that deductible could apply on the total insured value of the property. It could be $20 million, $30 million if it’s a large property or it could apply on each building’s individual value. Those are two completely different things. 99% of the clients I ask if I say, “What does your wind coverage look like?” “I have 3%.” “3% of what?” Honestly, it would be 1 in 100 that could sit back and talk to me and explain to me the differences between that 3% apply and to the total value of the property or to a building. I would say the wind coverages are one of the bigger ones. Understanding the terms of your policy, most people don’t want to. That’s where you need a partner like Multifamily Risk Advisors or somebody you trust. You can sit down in layman’s terms and explain to you what all of this stuff means because it is speaking a different language. It’s the language most people don’t care to learn.
[bctt tweet=”The insurance industry looks in the past to project what their rights will be into the future.” via=”no”]
It’s like reading the PPM, all the Greek in there. You need somebody to help you understand some of it sometimes. How do you all stand out from other providers that are similar?
It’s specialization. I have so many friends that are in the business that are “specialized” but they don’t. They’re in a variety of different industries. If I looked at my book of business, probably 96% of what I do is multifamily insurance. In the opening, you talked about how would we understand the mechanics of the industry. Insurance is one thing. The insurance is at a certain level a little bit easy part of the whole thing is understanding the whole industry, how the industry close. How do these assets need to be properly insured? Where is the industry moving? Finding out a couple of weeks before renewal that your property insurance premiums are going up by 30% is not the right time to be finding out about that. Aligning yourself with a partner that could sit here and could tell you six months in advance or eight months, the market is in troubled water. In fact, nobody is getting flat renewals. You can begin to budget. You can begin to plan. That’s a part of you understanding the industry as a whole and how the insurance companies are looking at that industry to be able to give guidance.
What are a few questions that we should be asking providers like yourself so we know we’re working with somebody that’s an expert like you?
Right out of the gate is, “How many multifamily assets do you currently insure and where?” A lot of times people will start talking to the agency, “We insure of whatever.” You need to understand from the agent level how many assets do you insure? How committed are you to this industry? What do you know about the apartment? What’s going on with habitational insurance? You’ll begin to figure out quickly if somebody is an insurance expert or if they’re a multifamily insurance expert by understanding the clientele that they might be dealing with or the number of clients in the industry they might be dealing with.
That’s a great take on that. I don’t think I’ve heard that before. Asking how much the agent specifically has under management or insuring as opposed to the entire agency that he works for.
Obviously every situation, every agency can be structured differently but I will tell you the vast majority are not like us. We work in a collaborative team environment. Most are individual cowboys out there trying to insure. They might be great agents. I’m not saying they’re not. I’m saying it takes a long time to specialize in a space, be committed to space like we are to multifamily and to grow a book of business. That space is far easier to take clients from whatever industry you can as we all try to figure out a way to put food on the table. With regards to Multifamily Risk Advisors, that’s what we do.
What’s the number one thing that’s contributed to your success?
I didn’t want to sit here and sound like a broken record. I was one of the cowboys when I first got in the industry. I sat somewhat in your shoes at one point. I was a builder-developer putting deals together. I did that for several years before back in ’08 when it went bad for so many people. I got recruited to basically go be a real estate insurance specialist by a large firm. At which point, it sounded like a good situation for me to leverage my experience. I got into it. I wasn’t five minutes into the job before they told me that you couldn’t survive as a specialist and to go work at everything else. Meanwhile, I had sold my company not a week before that.
In terms of what’s contributed to my success, it was probably leaving that position, taking and leveraging what I know and partnering with people that think as I do. It’s the difference between a surgeon and a general practitioner. Both might be highly qualified but one understands what they do very well. Ever since I’ve done that, my career has skyrocketed, my enjoyment and everything. That’s what I like to do. I like to know one particular thing and know the ins and outs of it.
That’s great advice as well and a great analogy also. Thank you for sharing that. Bryan, how do you like to give back?
At a local level, there are a couple of different charities that I like to work with here. A lot of times dealing with some issues with kids and things like that, having three daughters. The way that I do is something that’s always near and dear to my heart. There are a couple of different charities that I work with here locally on that. At a national level, I get involved with some environmental nonprofits that work in a variety of things like water quality here in Florida. It’s something that seems to be getting worse and worse. That’s how I try to give back.
Bryan, thank you so much for your time. Tell the audience how they can learn more about you and get in touch with you.
Bryan, thank you so much for your time. You’ve shared some valuable tips and nuggets for us especially in the multifamily industry, which I know most of us are. Either way, some great questions to ask, some great things we need to be knowing about it as we’re going through this due diligence process, getting those documents about the roof, the wiring and all the losses. Thank you. I appreciate the audience being with us. I hope you’ve left us a rating and review. I would appreciate that and share the show. I hope your business is growing. You’re learning a lot because of the show. Also, go to Life Bridge Capital and connect with me. I’m happy to schedule a call to help you any way I can. We will talk to you soon.
About Bryan Shimeall
My name is Bryan Shimeall and I am with Multifamily Risk Advisors (MRA). MRA, on a national, provides insurance and risk services for apartment investors, managers and developers. As one of the few multifamily specific insurance specialists in the country, MRA understands the mechanics of the industry and we support our clients in a variety of ways that are unique to the industry. Our service platform allows MRA to operate as an “outsourced risk manager” and a true partner focused on mitigating risk while reducing per door cost. Over our 20 years, we have gained an in-depth understanding of the apartment industry and its needs. As such, we have developed numerous innovative solutions to meet those needs by leveraging our relationships throughout the insurance world. We excel in the proper placement of resources, products, and services while supporting the overall growth of a portfolio.
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