The owners of apartment properties may soon struggle to renew insurance policies for floods and terror attacks, and that may already be increasing the difficulty in securing financing or refinancing for those properties.
Two federal programs that support these insurance policies—the National Flood Insurance Program (NFIP) and Terrorism Risk Insurance Program (TRIA)—are both about to expire.
“Property owners of all kinds suffer when the fate of the NFIP or TRIA hangs under a cloud of uncertainty,” says Kevin Donnelly, vice president of government affairs with the National Multifamily Housing Council (NMHC), an industry trade group. “When these programs lapse, loans with any federal backing are unable to go to closing or loans are unable to be refinanced.”
Flood is insurance increasingly expensive, difficult to get
Apartment properties threatened by flooding need to have flood insurance in order to secure many kinds of financing. However, flood insurance has become increasingly expensive, and the extra cost has become unpredictable.
“Pricing keeps going up, up, up!” according to a president at one national apartment firm, who preferred not to be named. “We’ll spend the next few months finalizing our 2020 insurance and want to make sure the process stays competitive. It is a tough environment.”
The NFIP has been on the brink of expiring for two years. Congress has extended the program over and over again—often at the last minute, however, and not for very long. There have been 12 short-term re-authorizations, according to Donnelly. Sometimes they’ve lasted for two weeks, sometimes for up to six months.
In September 2019, Congress passed its most recent short-term re-authorization that will keep the NIP going until November 21, 2019. “This has the potential to delay or increase the cost of capital,” says Donnelly. “Typically, the window of concern begins three to six months before any lapse, given how long transactions can take to close.”
The potentially higher interest rates add yet another expense to the rising cost of developing apartments, according to Donnelly. Congress has been considering two different long-term proposals to extend the program since this summer, but it’s not clear when these proposals might become law.
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