Windstorm Availability, Costs Improve For CRE

by Bernard M. Brown
on July 03, 2007 No Comments
Categories : E-Features

Hurricane season began a month ago, and we have already had two named storms – Andrea and Barry. The prognosticators have again predicted an active storm season, but not as loudly – they were wrong last year, after predicting the same scenario.
   Nationwide, commercial insurance premium rates have fallen steadily over the past year. The only insurance buyers who continue to be hammered are ones in the Southeast, who have experienced losses over the past two years. For them, premium hikes have been upwards of 50% or more. For all others, rates have generally declined.
   The important points to keep in mind about windstorm insurance at this juncture are as follows:
   Availability. Windstorm coverage is generally available for the limits required by most commercial real estate borrowers. After Hurricanes Katrina and Rita in 2005, it was estimated that available windstorm capacity was cut in half. With the increased profitability of the insurance industry in general, plus a few new entrants into the market, capacity is increasing on almost a daily basis.
   Prices. For properties located in hurricane-prone areas, the cost of windstorm insurance could equal 100% to 200% of the cost of the basic so-called "all risk" (an oxymoron if ever there was one!) property policy.
   Deductibles. We are seeing more quotes with 10% deductibles, but lenders by and large aren't jumping on this bandwagon. Five-percent deductibles are the norm.
   We are also seeing "unit" deductibles that apply percentage deductibles separately to the value of the structure and to loss of rents/business income. Generally, unit deductibles help an insured party when there is a loss.
   PML studies. Probable maximum loss (PML) studies are coming at us from all angles, as they are relatively cheap to produce and because they are the only way a borrower can support a request for windstorm limits lower than full replacement cost.
   The problems with PML studies are that the science is new, and the prominent rating agencies aren't convinced of their validity – particularly for a single asset. For a portfolio, PML studies may be an appropriate way to gauge how much windstorm insurance should be required of a borrower.
   Dead deals. We have seen or heard about a dozen deals that did not materialize because of the cost of windstorm insurance. Most of these were in the preliminary phase – not after all the work had been done and a closing was imminent.
   Premium caps. Some of the large borrowers are insisting on premium caps in their loan documents, just like we see for terrorism insurance.
   Force-placement. "Lender-provided insurance," as we euphemistically call it, is available for windstorm coverage only. The cost is $3 to $10 per hundred dollars, according to Nick Yuhas of Althans Insurance, a force-placed expert. This cost seems high, but most borrowers only keep it for a month or so until they can replace it with their own coverage.
   In conclusion, the insurance industry is offering more windstorm coverage at lower rates. If the season is benign, then this trend will continue, and vice versa.
   But the cocktail chatter among insurance underwriters regards the fallout if a Category 4 or 5 storm hits the Northeast. It happened in 1938 and in 1821. Maybe we are about due for another?
   Bernard M. Brown is president of Stamford, Conn.-based Insurance Advisors LLC, a property insurance coverage advisory firm that serves the commercial real estate finance and investment sectors. He can be reached at (203) 329-4490.

E-FYI

CBA Commercial Issues Securitization

CBA Commercial LLC, a Stamford, Conn.-based mortgage investment firm, has issued CBA commercial assets small-balance commercial mortgage pass-through certificates, series 2007-1. The certificates were offered in a private placement pursuant to Rule 144A.
   According to the company, the $127,607,624 securitization is backed by 237 small-balance multifamily, commercial and mixed-use mortgage loans acquired by CBA Commercial. The average principal balance of the loans as of this issuance is $538,429.
   Deutsche Bank Securities Inc. and Greenwich Capital Markets Inc. were the initial purchasers of the certificates, CBA Commercial adds, and Litton Loan Servicing LP is the servicer and special servicer.
   Series 2007-1 is CBA Commercial's fifth offering. The company issued small-balance commercial pass-through certificates, backed by mortgage loans it had previously acquired, in November 2006, April 2006, July 2005 and December 2004.

HRC Acquires Questor LLC

New York-based Hudson Realty Capital LLC (HRC), a real estate private equity firm, has acquired Questor LLC of Portland, Maine, a real estate consulting firm providing due diligence and underwriting services to the real estate industry.
   "Acquiring Questor helps us better achieve our goal of being expeditious, transparent and thorough in our due diligence and underwriting," says Spencer Garfield, managing director of HRC. "By extension, we are better able to serve our clients."
    HRC has also announced its relocation to 250 Park Avenue South in New York City. The move to larger offices is in response to the company's overall growth since its inception in 2002, HRC says.

E-Dealmakers

VA: ADDISON AT WYNDHAM, GLEN ALLEN

WHAT: Completed in 1998, Addison at Wyndham is a Class A apartment complex that consists of 312 units in 14 two- and three-story buildings.
    WHO: Atlanta-based Union Capital Investments LLC, a commercial real estate lender, provided permanent financing for the refinance of the complex.
    $$$: $30.85 million.
    TERMS: The 5.75% fixed-rate loan has a 10-year term with interest-only (IO) payments. LTV: 77%; DSC: 1.26.
    Union Capital Investments: (404) 812-4800.

CA: DOWNTOWN MARRIOTT, LOS ANGELES

WHAT: The property is a 469-room, full-service hotel. Portions of the loan proceeds are dedicated to property rehabilitation and upgrades.
    WHO: Birmingham, Ala.-based Collateral Real Estate Capital LLC arranged the financing as an on-the-books transaction with an institutional lender.
    $$$: $110,050,000.
    TERMS: A three-year, interest-only loan was secured.
    Collateral Real Estate Capital: (585) 383-5570.

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