Insuring affordable housing

When I tell colleagues my market niche is affordable housing, I often get raised eyebrows. When you say affordable housing, many people envision run-down public housing and neighborhoods they wouldn't want to live in. These stereotypes, however, no longer paint an accurate picture of the industry.

The affordable housing market changed dramatically in 1986, when the federal government introduced the Low Income Housing Tax Credit. The LIHTC offers private developers incentives to build low-income rental housing. The tax credits are distributed through allocating agencies, and developers can use them to reduce their tax liability–or sell to others–in exchange for meeting certain affordable housing requirements. To qualify, building owners must set aside at least a certain percentage of units for low-income tenants: either 20% for individuals whose incomes are 50% or less of the area median income or 40% for individuals whose incomes are 60% or less of that figure. The gross rent paid by families in designated low-income units may not exceed 30% of the applicable qualifying income.
The legislation signaled a philosophical shift from having government develop and manage properties to giving private industry an incentive to take on the task. Commercial real-estate developers jumped on the opportunity. In the last decade, LIHTC developers have built more than 800,000 low-income housing units.
Today, competition for LIHTCs is fierce. There are far more qualified applications than there are available credits. This has raised the bar for the affordable housing industry. Tax credits are allocated under state law, and the criteria are heavily weighted toward developers that are involved in their communities and have strong track records for managing quality properties. The "absentee landlord" stereotype is not applicable to today's LIHTC owner.
The changed nature of affordable housing presents new opportunities to agents and insurers. Affordable housing represents billions of dollars in commercial real-estate values. This business is spread across urban, suburban and rural locations–with an estimated 42% in suburbia–and is present in all regions of the country. Properties tend to be newly construc-ted rather than rehabbed, although there are significant clusters of larger rehabbed properties in central cities. The trend is toward mixed housing where "affordable" is a component. In many projects, you can't distinguish market-rate housing from affordable housing.
There is considerable variety among property owners–both among nonprofit and for-profit participants. Owners include individual developers; community development organizations; real-estate firms; and major investors like Goldman Sachs, Chase Manhattan and Fannie Mae. I focus my marketing efforts on the investors, lenders and financial intermediaries that influence a large number of the deals that get done, although there certainly are other approaches to this niche.
According to a U.S. Department of Housing & Urban Development national survey, 70% of owners are for-profit businesses. Most work in a single state in multiple neighborhoods. A majority had substantial experience before developing a tax-credit property, although some had no prior development experience whatsoever.
While there may be tremendous competition among developers to build affordable housing, there is little among agents to handle these accounts. I first became aware of the void when I was sitting on the other side of the table. After graduating from college, I went to work in the community development field. During my career, I was responsible for managing 400 affordable housing units. Part of my job was obtaining the insurance. I quickly learned there was little competition for affordable-housing business. Prices were high and policies offered "below market" coverage, much of it written by E&S carriers. Few brokers understood the industry. Like many of my colleagues, I often had difficulty buying an insurance program that would meet investors' requirements. Frustrated with the status quo, I served on the board of the Massachusetts Fair Plan. The more I learned about insurance, the more interested I became in getting into the business. I became licensed, joined an agency and began specializing in affordable housing. It continues to represent a significant percentage of my book of business.
Whether or not you choose to target affordable housing, it is a business segment worth exploring. More and more mainstream commercial real-estate projects have an affordable housing component. In Boston, for example, if a developer wants to build an office tower, it needs to link the project to affordable housing. "Inclusionary zoning" practices in many suburban communities require developers to allocate a percentage of a new development to affordable housing units in exchange for the right to build more market-rate housing than is currently zoned. But if a project includes more than a certain percentage of affordable-housing units, insurance underwriters may "flag" it. If you don't know how to position the account correctly or have access to the right underwriters, you could lose the entire account–and your credibility with your client.
To be successful in this niche, agents need access to high-quality insurers that want to write this business. Finding them can be a challenge. While affordable housing attracts top-tier investors, it doesn't attract the same level of insurers. There is an unspoken perception that character and income are connected, and that lower income means more claims. Our agency's book of business simply doesn't bear that out. We write a lot of real estate. The fact is, we see more claims from the luxury condos that insurers bend over backward to write than we do from our affordable housing properties.
Another insurer misconception is that affordable housing properties aren't adequately insured. The reality is that quality of coverage is extremely important to these buyers. Investors typically demand A-rated paper and insurance to value. In the insurance programs we see, the typical privately owned building is underinsured. Affordable housing properties, on the other hand, often are overinsured–even when they have replacement-cost policies. But perception is often more powerful than reality, so it can be challenging to get underwriters to spend time understanding these accounts.
We work with Distinguished Programs, a program administrator that specializes in designing programs for the residential and commercial real-estate industry. They listened and invested in the due diligence necessary to understand affordable housing. Together, we've created a program that's working well for us and generating good underwriting results for them.
Just as the right insurance market is critical, so is the right client. We choose our clients carefully. The owners we partner with are involved with their properties and residents. We've consistently seen that the quality of ownership is the best predictor of the future of the building. Good owners, in turn, tend to attract good tenants. The quality of service the landlord provides affects tenants' behavior, and that affects losses. Affordable housing is a close-knit industry; you learn quickly who the good and bad owners are.
Affordable housing is a clearly identifiable market, which is to an agent's advantage. There are conferences, associations and publications devoted to the industry. Community development corporations are the heart of it, and there are 4,000 to 5,000 of these groups nationwide. It's in these corporations that you will find the market's movers and shakers. As with any niche market, agents need to get involved with the affordable-housing market and be viewed as part of it. Many people involved in community development are passionate about what they do. They view their work as a calling, not just a job–and they look for the same kind of commitment from agents and other service professionals with whom they do business.
In affordable housing, a close relationship with a decision-maker isn't enough to close a deal, however. Each deal stands on its own merits. Every detail of the insurance and risk management program an agent brings to the table is scrutinized. Typically, multiple parties are involved. Development arrangements for tax-credit properties can be extremely complex. For example, 40% of owners of early-decade properties obtained tax-credit equity through a syndicator.
Affordable housing accounts can be labor-intensive. Constant interaction and a lot of certificate work are required. When there are claims, the agent needs to do a lot of hand-holding. I have a specialized service team that works exclusively with me. We've designed some customized software that helps us deliver the service these clients demand as cost-effectively as possible.
Outlook
There are developments on the horizon that likely will encourage business to continue investing in affordable housing. Better-designed properties are increasing the acceptance of affordable housing in mixed-income communities. Government agencies are working to support private development. They're reducing red tape, speeding the approval process, modifying building codes and updating zoning laws to encourage new construction and rehab of older properties. In November of 2006, the Internal Revenue Service announced that states would receive $1.95 per capita in housing tax credits in 2007, up from $1.90 in 2006.
The growing need for affordable housing, coupled with opportunities for investors, should keep this business sector healthy for the foreseeable future. Agents who take the time to understand this segment and partner with clients will be in high demand. Kyle McKinney is an account executive with Global Insurance Network Inc., a full service insurance and risk management firm headquartered in the Metro Boston area. The agency also has offices in Atlanta, Ga., and Boca Raton, Fla.