Are Your Property Transfers and Acquisitions at Risk?

Over the past several years, exclusions for mold, microbial matter and lead-based paint have consistently appeared on general liability policies to create substantial coverage gaps.

As a result, uncovered claims can be significant. Take, for instance, the discovery of mold in an apartment community in the State of Delaware. A leaking kitchen sink was the verified cause of discoloration and foul odor in a bedroom ceiling as well as the dark-rimmed holes in the bedroom ceiling.

Despite repeated complaints, building management was slow to respond resulting in health-related issues for the two women living in the apartment. During the law suit, the women demonstrated that the owners rarely performed repairs beyond cosmetic patchwork. After two weeks of testimony, the jury awarded $1.04 million to the complainants for personal injuries.

Another example of catastrophic loss occurred at a condominium complex in the Northeast. It included the sickening of two people as well as the death of a 50-year-old woman who contracted Legionnaire’s Disease. The resulting effects included evacuating the entire complex, disinfecting the water system and a significant law suit.

As the above-mentioned situations show, habitational property owners have significant environmental worries.

Other environmental risks commonly associated with habitational real estate may include, but are not limited to:

• Contaminants from known and unknown historical usage/operations or neighboring properties
• Construction debris containing hazardous materials
• Sick Building Syndrome i.e. carbon monoxide, mold, or bacterial air releases from faulty heating, ventilation or air conditioning systems
• Hazardous chemical storage (such as maintenance degreasers, pool chemicals, pesticides and herbicides used both indoors and outdoors)
• Lead, asbestos, polychlorinated byphenols (PCBs)
• “Midnight dumping” on vacant land parcels
• Leaking underground or aboveground storage tanks or piping.

Managing the risks

Despite the obvious challenges, environmental liabilities needn’t be an obstacle to property transfers and acquisitions if they are proactively identified, managed and mitigated.
In recent years, habitational real estate developers and owners alike have mitigated their environmental exposures through contractual means, the use of environmental insurance or the combination of both. This trend is also likely to continue due to the ever-increasing need of financial institutions to protect their loans in today’s economic climate and the desire of sellers, who would prefer to be free from potential claims related to unknown legacy issues.

At the top of the ($2.5B annual premium) environmental insurance market are the five leading environmental liability insurers of AIG, XL Capital, Zurich, ACE USA, and Chubb, which account for approximately 90 percent of the total premiums written. However, the remaining 10 percent of the environmental liability insurance market is growing with a number of very solid insurers providing at least some form of environmental liability insurance. These markets include Liberty, Markel Underwriting Managers, American Safety, Freberg Environmental/Endurance and Great American.

Available coverages

Each environmental liability insurer offers its own manuscripted coverage forms. To complicate matters even more, each insurer also offers a portfolio of environmental liability coverage forms, with the largest offering up to 15 different coverages totaling over 100 forms in the marketplace.

Among these is Premises Environmental Liability/Pollution Legal Liability (PLL), which provides coverage for pollution conditions or events on, at, under or migrating from a covered location(s). Coverage is afforded for third-party bodily injury, property damage, clean up costs and legal defense expense. A unique feature of many PLL policies is their ability to offer various and different coverage parts under one policy form. This includes, but is not limited to:

• New pollution conditions
• Existing pollution conditions
• On site clean-up coverage
• Transportation coverage
• Non Owned Disposal Site (NODS) coverage
• Business interruption including Loss of Rental Income
• Mold liability coverage and clean-up
• Legionella coverage
• Fines and Penalties and Punitive Damages where allowable by law
• Natural Resource Damages.

PLL is an effective risk management tool for commercial real estate since it helps to fill the “environmental gap” left in most general liability policies. It also helps reduce the uncertainty about environmental liability associated with the property and provides simple asset protection from potentially catastrophic environmental events associated with day-to-day operations.

In today’s environmental insurance market, available programs can even be tailored to address the diverse needs of each property and then structured to meet a variety of requirements that include regulatory obligations, contract requirements, lender requirements, landlord obligations, and business objectives. Another important aspect of coverage offered under PLL is that it can be structured to provide coverage for contamination, even if it is known certain environmental conditions already exist on site.

Fortunately, the environmental insurance marketplace is continually adapting to keep pace with the growing risk management demands of real estate owners and lenders—demands that are not likely to subside in the near future due to the costly nature of environmental liabilities.

DIFFERENT TYPES OF COMMERCIAL INSURANCE

The most common types of commercial insurance are property, liability and workers’ compensation. In general, property insurance covers damages to your business property; liability insurance covers damages to third parties; and workers’ compensation insurance covers on-the-job injuries to your employees. Depending on your business, you may want additional specialized coverages. Listed below are some of the different types of business insurance.

PROPERTY INSURANCE Property insurance pays for losses and damages to real or personal property. For example, a property insurance policy would cover fire damage to your office space. You can purchase additional coverages for business property, including:

Boiler and Machinery Insurance Boiler and machinery insurance, sometimes referred to as “equipment breakdown” or “mechanical breakdown coverage,” provides coverage for the accidental breakdown of boilers, machinery, and equipment. This type of coverage usually will reimburse you for property damage and business interruption losses. For example, this coverage would cover fire damage to computers.

Debris Removal Insurance Debris removal insurance covers the cost of removing debris after a fire, flood, windstorm, etc. For example, a fire burns your building to the ground. Before you can start rebuilding, the remains of the old building have to be removed. Your property insurance will cover the costs of rebuilding, but not of removing the debris.

Builder’s Risk Insurance Builder’s risk insurance covers buildings while they are being constructed. For example, a Builder’s risk policy would cover losses if a windstorm takes down your partially constructed condominium complex.

Glass Insurance Glass insurance covers broken store windows and plate glass windows.

Inland Marine Insurance Inland marine insurance covers property in transit and other people’s property on your premises. For example, this insurance would cover fire-damage to customers’ clothing from a fire at your dry cleaning business.

Business Interruption Insurance Business interruption insurance covers lost income and expenses resulting from property damage or loss. For example, if a fire forces you to close your doors for two months, this insurance would reimburse you for salaries, taxes, rents, and net profits that would have been earned during the two-month period.

Ordinance or Law Insurance Ordinance or law insurance covers the costs associated with having to demolish and rebuild to code when your building has been partially destroyed (usually 50 percent). For example, your three-story building is 100 years old. A flood destroys the basement and first two stories. Because more than 50 percent of your building has to be rebuilt, a local ordinance requires that the building be completely demolished and rebuilt according to current building codes. Property insurance covers only the replacement value, not the upgrade.

Tenant’s Insurance Commercial leases often require tenants to carry a certain amount of insurance. A renter’s commercial policy covers damages to improvements you make to your rental space and damages to the building caused by the negligence of your employees.

Crime Insurance Crime insurance covers theft, burglary, and robbery of money, securities, stock, and fixtures from employees and outsiders.

Fidelity Bonds A bond company covers losses due to a bonded employee’s theft of business property and money.

LIABILITY INSURANCE Liability insurance covers injuries that you cause to third parties. If someone sues you for personal injuries or property damage, the cost of defending and resolving the suit would be covered by your liability insurance policy. A general liability policy will cover you for common risks, including customer injuries on your premises. More specialized varieties of liability insurance include:

Errors and Omissions Insurance Errors and omissions (“E & O”) insurance covers inadvertent mistakes or failures that cause injury to a third party. The act must actually be an inadvertent error, and not merely poor judgment or intentional acts. For example, an E & O policy would cover damages arising from an insurance agent failing to file policy applications, or a notary forgetting to fill out notarizations properly.

Malpractice Insurance Malpractice insurance, or professional liability insurance, pays for losses resulting from injuries to third parties when a professional’s conduct falls below the profession’s standard of care. For example, if a doctor makes a mistake that other doctors of his specialty would not have made, his patient might sue him. A malpractice policy will pay his defense costs and any judgment or settlement. Malpractice insurance is available for doctors, dentists, accountants, real estate agents, architects, and other professionals.

Automobile Insurance Commercial automobile policies cover the cars, vans, trucks and trailers used in your business. The coverage will reimburse you if your vehicles are damaged or stolen or if the driver injures a person or property.

Directors’ and Officers’ Liability Insurance This type of insurance is generally purchased by corporations and nonprofit organizations to cover the costs of lawsuits against directors and officers.

WORKERS’ COMPENSATION INSURANCE Workers’ compensation insurance covers you for an employee’s on-the-job injuries. Businesses with employees are required by various state laws to carry some type of workers’ compensation insurance. In most cases, workers’ compensation laws prohibit the employee from bringing a negligence lawsuit against an employer for work-related injuries.  

Source: Findlaw.com

Real-Estate Markets Still Plumb for Bottom

Have you seen the cost of other insurance?

By Anton Troianovski / Wall Street Journal

What began as a bad year for real estate turned into one of the worst on record, driven by an unprecedented drop in home prices, a tide of foreclosures and a credit crisis whose magnitude few anticipated.

“I thought it would be a bad year,” said Mark Zandi, chief economist at Moody’s Economy.com. “I didn’t think it was going to be a complete washout.”

And as bad as 2008 was, few are ready to say the worst is over. The troubles in the residential sector are expected to continue, while problems are just beginning for the other side of the real-estate market — office buildings, hotels, shopping malls and other commercial properties — as the recession starts to have an effect.

“The question on everyone’s mind is, ‘How is the government going to try to solve this?’ ” said Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley.

On the residential side, many are urging the Obama administration to push for broad programs to limit foreclosures, stimulate demand for homes, and stop the slide in prices. The Treasury Department is considering a plan that would push down rates on home mortgages to 4.5%.

One of the government’s highest-profile efforts so far, Hope for Homeowners, lets banks move borrowers into government-insured loans if lenders agree to write down a portion of the principal. But very little of the $300 billion pledged by the Department of Housing and Urban Development has been put to use so far, in part because investors who hold those loans would incur big losses.

Commercial developers are also hoping for a lifeline from Washington, perhaps guaranteeing chunks of new commercial mortgages.

House prices fell 23% from their July 2006 peak to October 2008, the latest data available, based on the S&P/Case-Shiller Home Price index, which tracks home values in 20 cities. Mr. Zandi expects an additional 10% drop to a bottom late this year.

One in 10 homeowners with a mortgage is either in foreclosure or delinquent on payments, the Mortgage Bankers Association said last month.

Banks have tried loan-modification programs to stem the crisis but with limited success. More than half the mortgage loans that were modified were more than 30 days late six months later, according to a government report last month.

Regions that had been booming were hit especially hard by the bursting of the real-estate bubble. In the Southwest and Florida, homes lie vacant along the winding streets and cul-de-sacs of brand-new subdivisions.

In Phoenix, home values have fallen 41% from their peak in June 2006. “Boomers who we counted on coming down here when they retire can’t sell their homes in Chicago or Michigan or other places, so they’re not coming,” said Betsy Kurasch, a local real-estate agent with ReMax Achievers.

Wall Street is feeling the effects as well as Main Street. Securitization, the packaging of loans into investment products, had allowed new mortgages to be issued at huge volumes and helped to inflate the housing bubble. It essentially disappeared as credit markets seized up amid problems with subprime loans, with some of the biggest financial institutions in the country taking a hit. Residential-mortgage originations fell to $300 billion in the third quarter — a 50% drop from a year earlier, according to Inside Mortgage Finance, a trade publication.

For commercial real estate, the troubles that lie ahead could hurt pension funds and college endowments that moved money into real estate in recent years as the market was booming, as well as real-estate magnates.

The commercial market “is going to be ugly for the next 12 to 24 months,” said Michael Restuccia, chairman of the San Joaquin County (Calif.) Employees’ Retirement Association. “Not just bad, but ugly.”

A preview of the ugliness — as well as opportunities for investors with cash to spend — came last spring, when loans coming due forced New York property titan Harry Macklowe to sell some of his prized office towers.

It’s hard to know how far commercial-property prices have fallen because the lack of credit has made it hard to buy big buildings. In the office market, for instance, only $1 billion of deals on fewer than 50 properties closed across the U.S. in November, according to research firm Real Capital Analytics. That’s a 90% drop from November 2007.

The stock market provides clues to how investors are pricing commercial real estate, and the picture isn’t pretty. The Dow Jones Equity All REIT Index, which tracks many public real-estate company stocks, fell 40% in the last three months of 2008.

The poster child so far: Retail landlord General Growth Properties Inc., which received an extension last month on an overdue loan as it struggled to pay down its $27 billion debt load. The share price of the Chicago-based owner of more than 200 U.S. malls plunged to $1.29 from $41.18 over the course of the year.

Investors are especially concerned about sectors of the market most exposed to cutbacks in spending by consumers and corporations: shopping malls, warehouses, office buildings, and most of all, hotels, which are suffering as consumers and businesses cut spending on travel. Companies involved in health-care facilities and senior housing are considered somewhat safer, in part because of the coming wave of retiring baby boomers.

There are questions facing commercial real estate this year: How much further will real-estate stocks fall? Will property owners with debt coming due find ways to refinance? And will the investors who committed billions to commercial property in the past few years be willing and able to make good on those commitments?

“For economists now to make forecasts is a pretty difficult thing,” said Ray Torto, chief global economist at real-estate firm CB Richard Ellis. “All of our models are outside the territory in which they’ve been built.”

AROUND THE COUNTY

Ryan, Kelly

Projects, developments and other activity in cities in and around OC

IRVINE

Construction crews are making progress on what’s billed as an environmentally friendly apartment complex near Jamboree Road and Main Street. Main Street Village, also known as the MetLife Apartments, is set to be Orange County’s first apartments certified for environmentally sound construction and building management techniques under the U.S. Green Building Council’s Leadership in Energy and Environmental Design standards. The developers hope to attract renters who value environmental practices. The real estate investments division of Metropolitan Life Insurance Co. has owned the 10-acre site since the 1980s. A single-story industrial building was demolished about four years ago. General contractor White Residential Inc. began building in spring 2007. White Residential is based in Kirkland, Wash., but has an Irvinc office. The complex has two pools, a 12,000-square-foot clubhouse, a 1.000-square-foot fitness center, a basketball court and a children’s playground. Main Street Village will have 481 apartments ranging from 640 square feet to 1,424 square feet. The entire complex is 500,000 square feet. The first of five construction phases should finish in January, with some residents moving Jn then. The final phase should be finished in late 2009. Project and construction management services are being done by Lincoln Property Co. in Irvine. Architects Orange is the architect.

NEWPORT BEACH

Anaheim Hills-based Bomel Construction Co. is building a parking structure for Hoag Memorial Hospital Presbyterian near Pacific Coast Highway and Newport Boulevard. The structure, designed by Parkitects in Irvine, has three levels and 771 parking spaces. Hoag Hospital had a building on the site that was demolished. The building was one of several that housed research and development as well as office space for the hospital. The remaining buildings on the site are being transformed into a new Hoag Health Center. The hospital has several health centers across OC, including in Irvine, Costa Mesa and Huntington Beach. The new center won’t open until the parking structure is complete, which could be as soon as the end of this year.

LACUNA NIGUEL

A Walgreens drugstore is nearing completion at Crown Valley and Alicia parkways. The building replaces a Farmer’s Market and Blockbuster. Demolition of that part of the Laguna Niguel Town Center began in January. The drugstore will span 13,000 square feet with the main entrance near Alicia Parkway. There also will be a second-floor mezzanine in the back for storage. Valencia-based Lundgren Management Corp. is overseeing construction, which should be done in September. Arizona-based Robert Kubicek Architects and Associates Inc. designed the building.

LOS ALAMITOS

A Precious Life Shelter for homeless pregnant women is going up near Katella Avenue and Los Alamitos Boulevard. Nonprofit HomeAid Orange County is developing the $880.000 project with several builders, contractors and suppliers. The 5,631-square-foot project calls for five apartments with 12 beds, a meeting room and childcare facility spread over two buildings. The apartments are outfitted with garages and laundry hookups. The shelter previously had two older houses on the property, which were demolished. There was a groundbreaking at the site in April and construction crews should be done in the fall. Irvine-based Empire Homes is the lead builder for the project. JZMK Partners in Irvine is the architect.

NEWPORT BEACH

The June 23 Around the County column should have said the builder of Newport Harbor High School’s multipurpose theater building is San Fernando-based Bernards.

If you’re a developer or city planner and would like to see a project featured in Around the County, please contact Kelly Ryan at ryan@ocbj.com or (949) 833-8373. The column covers projects in Orange County s cities and unincorporated areas, and some projects in Corona. Commercial, housing and retail projects are the focus of the column. Some larger public works projects also are included.

Copyright CBJ, L. P. Jul 7-Jul 13, 2008
Provided by ProQuest Information and Learning Company. All rights Reserved

CAP REIT Acquires North Toronto Apartment Complex

Canadian Apartment Properties Real Estate Investment Trust (“CAP REIT”) (TSX: CAR.UN) announced today that it has acquired two adjoining apartment properties located in North Toronto close to the Bayview Shopping Centre. The complex, consisting of 143 mid-tier suites, has easy access to Sheppard Avenue, Highway 401 and the subway line. The purchase price for the property was $14.0 million ($98,000 per suite) with a new CMHC insured mortgage of $10.8 million for a 5 year term at an interest rate of 4.69%. The balance of the purchase was funded from CAP REIT’s acquisition facility.

The property has had extensive retrofits to the roof, windows, balconies and heating system. In addition, the opportunity exists to enhance cash flow from the property as a number of existing rents are well below market. Occupancy currently is 98.6%.

“We are pleased to be completing our first acquisition for 2008, and remain committed to achieving our annual target of acquiring between 1,500 and 2,000 suites once again this year,” commented Thomas Schwartz, President and Chief Executive Officer.

As one of Canada’s largest residential landlords, CAP REIT is a growth oriented investment trust owning interests in 27,996 residential suites and two land lease communities comprising 1,233 land lease sites located in or near major urban centres from coast to coast. Since its Initial Public Offering in May 1997, CAP REIT has grown monthly distributions per Unit by 51%. For more information about CAP REIT, its business and its investment highlights, please refer to our web site at www.capreit.net .

Contacts: CAP REIT Mr. Michael Stein Chairman (416) 861-5788 CAP REIT Mr. Thomas Schwartz President & CEO (416) 861-9404 CAP REIT Mr. Yazdi Bharucha CFO & Secretary (416) 861-5771 Website: www.capreit.net

 

Apartment Complexes & Buildings

Apartment owners can face severe financial consequences from a property loss by fire, wind or other causes. They also face potential losses from liability claims associated with swimming pools and spas, saunas, playground equipment, sponsored events, parking areas, advertising, and more.

With our extensive industry background, Farmers has designed insurance coverage forms that provide the most comprehensive and innovative insurance solutions for apartment buildings, no matter the size or complexity.

Our highly dedicated, top-tier Claims professionals are there to get you back where you belong, and our loss control professionals will work with you to prevent or to mitigate loss potential in your business.

The Coverage

Here are some of the coverage options that are available to you to help you with your insurance needs:

Property and Inland Marine

·      Buildings at Extended Replacement Costs or Actual Cash Values

·      Separate limit for Specified Property (Pools, Fences, etc.)

·      Automatic Increase in Building Amount (inflation guard)

·      Contents at Replacement Costs or Actual Cash Values

·      Loss of rental income and extra expense on an actual loss sustained basis for 12 months or other extended period.

·      Loss in value of undamaged building portion, demolition or increased construction cost to meet ordinance or law requirement

·      Comprehensive equipment breakdown coverage

·      Coverage extension to newly acquired buildings

·      Fire department service charge and extinguisher recharge cost

·      Outdoor signs

·      Debris removal or clean up cost

·      Pollutant clean up cost

·      Back up of sewers or drains or appliances

·      Accounts Receivables and Valuable Papers coverage

·      Computer equipment including Media & Records

·      Earthquake or earthquake sprinkler leakage

Crime

·      Employee Dishonesty

·      Money & Securities – from both inside and outside the premises

·      Forgery & Alteration

·      Money Orders & Counterfeit Currency

 

General and Other Liability

·      Operations and Premise liability including parking lot liability

·      Personal and Advertising injury liability

·      Products and Completed Operations liability

·      Contractual and Owners Protective liability

·      Hired and Non-owned automobile liability

·      Employee Benefits Liability

·      Medical payments and Tenant’s Legal Liability

·      Per location aggregate limits