Multifamily Lender Insurance Considerations

When it comes to acquiring and refinancing apartment buildings with values greater than $5 million, the key lenders are often the Agency Lenders (Freddie Mac, Fannie Mae, FHA, USDA, etc.), Life Insurance companies, CMBS, Debt Funds, and Bridge lenders. But there are some unique and nuanced lender insurance requirements from the above Non-Bank lenders that are different from lenders that many borrowers (our insureds) might be accustomed to, such as traditional community, regional, or national banks.

Here are questions that frequently come up in conversations with our insureds:

How will the Premium be Paid?
If the insured is transitioning from a Bank to a Non-Bank (i.e., Freddie Mac) lender, new insurance requirements will often be needed from the borrower (our insured). Many traditional banks allow insureds to be on Direct Bill – insured pays the insurance company in monthly or quarterly installments over the course of the year. The insurance agency or broker does not get involved with the collecting of any premium payments.

In contrast, Agency and CMBS lenders require borrowers (our insured) to pay the entire insurance premium for the year at closing through escrow. The insured is not allowed (*usually) to be on an installment billing schedule. This can create a headache for multiple reasons:

• If a policy is already on Direct Bill, insurance companies don’t allow the insured to change the billing mid-term.
• Suppose there are multiple properties on the policy. In that case, insurance companies do not have the billing capabilities to show an invoice that the property being refinanced or purchased has been paid in full.
• Insurance companies on Direct Bill do not charge by Property on an installment invoice — the total premium for all the properties on a policy is billed as one lump payment.

Why is my insurance more or less expensive than the seller if our insured is making an acquisition? And why is the new lender requiring these new insurance requirements on a refinance that increases my insurance premiums?

You are likely aware of basic factors that can drive the cost of your premiums, including Replacement Cost, Claim History, whether the property is insured on a Master policy or a standalone policy, current insurance company and length of time with that carrier. Here are some additional considerations with Non-Bank lenders that drive premium costs:

• Ordinance and Law Coverage B and C often need to be endorsed to a higher limit than a standard insurance company policy that a traditional bank requires if you are in the acquisition of or refinancing to a non-bank lender.
• Demolition Cost (O&L B) and Increased Cost of Construction (O&L C) need to each be 10% of the replacement cost of the property. This is a higher limit than normal to a policy and will add to your insurance premium costs.
• Increased Period of Restoration extends business income and extra expense coverage to provide additional time to restore operations when delayed due to enforcement of building or zoning laws. Again, this is not standard on all multifamily insurance policies.

What’s Next?

These are the top questions that are frequently asked when addressing Non-Bank lending acquisitions and refinances, but there are many other unique factors to consider. If you have any questions or want to talk further, please reach out to me at dennis.moynihan@thehortongroup.com.