Multi-Housing News - January 2009 - (Page 19)

property management What Keeps You Up at Night? Risk/Liability Management: When margins are tight, there’s far less room for error By Teresa O’Dea Hein, Managing Editor Hurricane Ike and, more dramatically, the disruption in the capital markets along with corporate collapses have made the last quarter of 2008 a stormy one. While leading risk managers say they are in relatively good positions going forward, job losses and poor economy mean margins are tighter. Jon Segner, president & COO of Dominium Management Services LLC, takes a broader view of risk management, which used to focus primarily on insurance. “I think risk also applies to credit markets and who you’re renting to. With all the job losses going on, how people can pay the rent is the most germane issue. We’re keeping a real close eye on credit scores. And you watch your bad debts, Most of Dominium’s multifamily communities are located in the Midwest, where wind and hail are usually the issues and tend to be more isolated causes of property damage. However, Ike did sweep through much of the central U.S. last fall. “Who would’ve thought that apartments in Ohio would’ve been impacted by a hurricane?” Segner wonders. Kay Jones, risk manager at UDR Inc., based in Highlands Ranch, Colo., says, “I think one of the current concerns involves all of the changes with insurance companies and executives jumping from one major company, such as AIG which focused on both property and casualty, to others. We can only speculate what the effect will be on the availability of insurance and capital markets and how this will play out.” Working with two key providers, UDR is heavily rolling out a renters insurance program. It is shooting for 100 percent participation and to that end, it has made it so that it’s a little easier for people to apply online for insurance at leasing offices. UDR Inc. is a multifamily real estate investment trust (REIT). It owns 44,223 apartment homes, with 2,047 homes under development and another 684 homes under contract for development in its pre-sale program. In Houston, where Hurricane Ike was a major force last fall, UDR owns or has interests in five communities, with 1,828 units. “You grow with every storm, learning lessons from each,” Jones says. Availability of technology is also helping, she says. “Text messaging has become a good way to communicate when phones are down.” Josh Herrenkohl, senior manager for Construction and Real Estate Advisory Services in Ernst & Young LLP’s Business Risk Services Group, says one of the biggest risks is fraud because the multifamily space is very transaction-heavy. Companies need strong practices in place to combat that.” In operations, Herrenkohl says he’s seen multifamily communities that use Excel instead of a General Ledger program. Also vital, he adds, is to maintain a separation of duties. “If a person cuts a check, they shouldn’t also be the one who approving the check, which could lead to potential fraud.” MHN NMHC Cost of Risk Survey Finds Rates Dropped in 2008 In 2008, insurance rates for apartment firms were down across the board, driven largely by decreasing rates for property and general liability, according to the latest annual Apartment Cost of Risk Survey (ACORS), conducted in fall 2008 for the National Multi Housing Council (NMHC). However, reports Jeanne McGlynn Delgado, vice president of business and risk management policy for the National Apartment Association (NAA) and NMHC, “Our survey showed a few areas where capacity was tight, such as in windstorm zones like Galveston, Texas. Our analysts attribute the premium reductions to insurance industry policyholder surplus, which grew largely in the preceding two years, 2006 and 2007. Still, it is unclear whether these price reduction trends will continue in 2009, Delgado notes, as insurers struggle with general economic uncertainty, underwriting and capital losses in 2008, lower investment returns for 2009 and likely regulatory reforms. These factors will likely reduce underwriting capacity, she explains, and many insurance carriers are already indicating that premium rates are as low as they can go to cover claims and maintain profitability. On average (nonweighted), the survey found that apartment firms saw a 17 percent price decrease in 2008. In addition, all three components of the total cost of risk for apartment firms— property, general liability and workers’ compensation—fell in 2008 compared to 2007, thanks to favorable underwriting and investment results recorded by insurers in the two prior years. Specifically, the survey indicates, costs for property insurance, which is 67 percent of the average apartment firm’s insurance budget, fell 13 percent. The number of firms with Directors’ and Officers’ liability coverage dropped from 100 percent in 2007 and 2006 to 55 percent in 2008, the survey says. On the other hand, the number taking out environmental coverage grew from 38 to 41 percent. Premiums for environmental insurance coverage fell 23 percent this year. “It used to be enough to have one or two back-up plans but now you need to have three or four…” where the first storm clouds are going to show up. Here, everybody’s a risk manager—you have to keep your eyes open for your own portfolio. “While there’s still a lot of renters out there, with the falloff from the mortgage market, their ability to pay is compromised,” notes Segner, whose Plymouth, Minn.-based company manages 17,500 apartments, three-quarters of which it also owns. “It’s a pretty sparse credit market, so we’re also looking at nontraditional transactions and at credit agreements with long horizons,” Segner says, “while also keeping in contact with our lenders. “It used to be enough to have one or two back-up plans but now you have to have three or four—Plan B, C, D, E and F,” says Segner. He’s relieved that Dominium’s insurance renewal was in August, before the Wall Street crisis took hold and Hurricane Ike hit. To save on premiums, Dominium has put higher deductibles in place, with stop-loss limits built in. www.multi-housingnews.com | January 2009 19 http://www.multi-housingnews.com

Table of Contents for the Digital Edition of Multi-Housing News - January 2009

Multi-Housing News - January 2009
Contents
From the Editor
Market Pulse
Executive Insight
Economic Forecast 2009: The Year Ahead
Apartment Market Outlook
Development & Design: Walkable Neighborhoods
Property Management: Handling Risk in a New Age
Directory: Top Brokers
Kitchen & Bath: Rehabs
Products: Noise Control
Technology: Property Management Software
Property Showcase: St. Regis, Bal Harbour

Multi-Housing News - January 2009