Navigating Insurance in Commercial Real Estate w/ Jeremy Goodrich | Sp.03 - The TCO Method

Episode Transcript
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(00:00):
The number one thing you have to do is have conversations with that person with your insurance

(00:05):
advisor from the beginning and just see if they make insurance simple.
[Music]

(00:32):
Welcome to The TCO Method, the only show focused on helping you massively increase your net
operating income. I am Andy McQuade and thank you so much for tuning in to another Saturday
interview special this time with my special guest Jeremy Goodrich. Jeremy is the Chief Protection
Officer at Shine Insurance Agency, host of the Managing Commercial Real Estate Risk Podcast

(00:58):
and the CRE Risk King on LinkedIn. An expert in CRE Risk Management and asset protection, Jeremy is
a teacher at heart helps his clients understand the challenging world of real estate insurance
and assists them in building a strategy to mitigate and minimize risk and exposure while making sure
that they have the right coverage to protect their assets. Jeremy, thank you so much for joining me.

(01:21):
I appreciate you taking the time. How have you been? I've been wonderful, Andy. Thank you for having
me really excited to chat with you and talk to your audience about something that is a little bit
hard sometimes risk management but actually if you think about it absolutely increases your NOI
over and over again as you think about it in your commercial real estate portfolio so happy to just

(01:42):
dig in and share with your audience today. Awesome. Well we've seen tons of stuff in the news about the
shocking or maybe not so shocking developments in Florida and Texas and other parts that have been
negatively impacted by all this crazy weather that we've been having and just in sanity with
tenants and all the other stuff so I guess maybe we start with current events and where the industry is.

(02:05):
I know they've been losing their butts for the last several years and they've decided this year
to really kind of pile on and stop losing money and there's a lot of people who are cranky about
that but it's a business so it's to be expected that they're not just going to hemorrhage money because
people don't want them to have their rates go up you know what I mean so why we start there.

(02:27):
Yeah absolutely so I mean you got at the heart of it right I mean when we're looking at insurance the
first thing to understand is you know insurance is is we're passing risk on to someone else there are
not a lot of people in the world who could go out and buy a $10 million apartment complex by themselves
right anybody who's involved in the commercial real estate world knows you have to have a team that

(02:49):
means lenders that means investors that means a lot of different things and one of those folks is
the people that you pass the risk of bad things happening on to right and that traditionally is your
insurance company and so if we say okay well that makes sense now I'm passing risk on insurance
companies are actually giving me the ability to do something that I wouldn't have been able to do before

(03:11):
it's like okay well now we get it all right so an insurance company is a for profit business like you
said and they're losing a ton of money like you said in 2021 just for example property
commercial property and this includes a lot of different kinds of property but the losses for
commercial property were about six billion dollars okay so that's a number has nothing to connect

(03:37):
with well let's give me something more to connect with in 2022 the losses on commercial property were
36 billion dollars now it doesn't take a rocket science to see that is six times as much as 2020 2021
and 2021 was higher than previous years but but not by much so in 2022 multiple things happen one

(03:59):
are what's called underwriting losses or the losses the insurance companies took simply by money
going out in claims increased sixfold six times so that was one thing in 2022 the other thing in 2022
for anyone who invests in stocks bonds any of those other places we invest besides commercial real
estate is that it wasn't a great year for investing on that side either right a lot of people lost a lot

(04:25):
of money on that side well where do insurance companies put all the money that they have in holding
before that they can you know pay it out in a claim well they put it into stocks and bonds in real
estate and other kind of investments and so it was sort of a double whammy not only did they lose money
on the underwriting side just how much they had to pay out in claims but they were also losing money

(04:46):
on the market and so insurance companies started to freak out probably is the best word for it
and we saw this in early 2023 where insurance companies were doing one of a few things one they
were just closing up shop for new business if you were in Texas for example you mentioned Texas as a
state that has had a drastic change right insurance companies were canceling policies no one and then

(05:12):
you ask your insurance agent to go out and find a new policy they're like man there aren't very
many people out there suddenly your insurance policies going from $20,000 a year to $100,000 a year
or something crazy like that right a lot of Texas property owners were experiencing that
and that was because it's a supply and demand thing if insurance companies are all shutting down in
Texas then the ones that are left are going to say huh well if I'm going to take the risk if I'm

(05:35):
going to be willing to ensure these properties I'm going to charge a lot more money for it and so
that's what we really saw and that's the current market across the country really right now I mean
those losses that I said 36,000 or 36 billion instead of 6 billion that is not just Texas that is
not just Florida that's not just Louisiana that is across the country that we're seeing in fact in 2023

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right now as we're recording we're in Q3 right of 2023 and we've already crossed beyond the
36 billion dollars of underwriting loss that we saw in 2022 so 2023 is already going to be a worse
year when it comes to claims disastrous things of that nature then 2022 was the good news is that

(06:24):
the stock market and that kind of area is doing a little bit better and so we're seeing the other
side of investment potentially looking better and so if we can just get a few few or big hurricanes
or big storms I think we could see things turn around a little bit in 2024 and start to see some
stabilization in the insurance industry so that was a quick version I don't know where you want to go

(06:46):
from there but that's kind of the high level what's going on in the industry right now.
So the only the only real question I have that I really kind of queued in on was the potential
turn around in 24 now typically we're not we don't see companies once they raise rates come back
down unless there's some sort of outward market pressure like a commodity where the price drops and then

(07:10):
for the raw materials and whatever in a service business like this where you're literally
taking on risk how would they price that in and would they lower rates or is that something where
we just might see it flatten and then just normalize over time. Yeah I mean we're not going to go
back to where we were before I don't think that's very likely I think that for example in Indiana

(07:31):
where I am you know we used to be doing for a standard apartment complex you might expect three to
four hundred dollars per unit as an annual insurance cost right and that is more like six hundred
now and that's never going to go back down to three to four hundred dollars a year. And it's not the
eighteen hundred dollars that they're seeing in Texas and Florida but that's again caused by the

(07:52):
exit of so many different companies you don't want to underwrite any risk there anymore. Exactly
right so that's going to be the big question. You know Florida is used to this in some ways it still
hurts but Florida you know since '06 '07 when a couple of hurricanes came through in a row we had that
exodus of insurance companies we had this supply and demand issue and so Florida investors have

(08:15):
seen this before are kind of prepared. I think the investors that are really shocked by what's going
on are the Texas investors and obviously there's a lot of folks investing in Texas and Texas prices
used to be significantly lower you could be in the six to eight hundred dollars a door especially if
you were in central Texas and even getting closer to the coast you would see some lower numbers now

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like you just said if your coastal Texas with a of a frame construction apartment complex that was
built before two thousand five you should expect fifteen hundred dollars a door at least getting into
that two thousand dollars a door and if you're not underwriting that for that you should be
that hurts there's just no way around it especially if you bought a property and you were underwriting it

(09:01):
at six hundred seven hundred dollars a door that could be a huge you know hit on your NOI.
Immediate erosion of asset value overnight. Just absolutely and so you know I also see a lot of folks
what you don't want it what I see folks do that is is I mean if you already bought the asset that's
one thing if you're thinking about buying assets you know getting deep into due diligence with a number

(09:26):
like six hundred dollars a door in coastal Texas or you know in the Harris County area or something
you know you get close to the end and you find out you're actually looking at two thousand dollars
a door that kills a deal you got a bunch of you know money on the line at that point
so I'm seeing a lot of carnage especially in Texas around this insurance things and property

(09:49):
taxes are another piece of the conversation too yeah the property taxes um I think the majority of
the property tax impact that people are claiming was unpredictable it was unpredictable for
inexperienced teams underwriting deals if the value of an asset goes up and you put a note on it

(10:10):
and it's recorded at the county your taxes are going to go on yeah that is like real estate one
on one and yet all these people are crying surprise I don't buy that for a second I think it's stupidity
but that's me and it's my show so I'll say what I want well yeah if you're using the property taxes from
you know the t12s or whatever and at the same time you're planning on increasing the value of the

(10:33):
property by 10 15% and you you aren't figured that out of the taxes then yeah you just don't really
understand how all this stuff yeah pretty much now insurance insurance was a little bit of a
shocker but having a relationship with your broker there should have been a conversation had
there like hey listen this is what we see coming you probably want to be aware of this and I know

(10:54):
that you're on top of that right that's your wheelhouse that's what you do yeah just like any other
business any other team that you build you've got 50% of people who were just show up and then you've
got like another 30% that are decent at what they do but they're not on top of everything and then
you've got that top 20% and then the you know the top five and I would put you in the top five of

(11:17):
of of insurance underwriters and operators for real estate in what you do but most people don't have
somebody like you on their team right so what kind of what kind of outreach should they be doing
proactively now that they've kind of gotten the black guy and the bloody nose how should that

(11:37):
relationship look and how do they identify somebody like you that they can find and work with obviously
you're on my show I want them to work with you but right yeah I mean well I work with large portfolio
so my clients have at least 200 units most of my clients have thousands of units so that's kind of
the folks that I work with so a lot of your listeners you know may not be able to work with me

(11:58):
anyway so really the place I'm coming from is providing advice and insight about the topic and I
think the number one thing you have to do is have conversations with that person with your insurance
advisor from the beginning and just see if they make insurance simple right like right especially in
the current market that we're in right now no one has a crystal ball no one including myself is

(12:20):
going to be able to tell you exactly get what's going to be happening six months from now a year
from now two years from now but someone should be able to make it as simple and clear as possible so
that would be my number one thing to say I think you have to go with an independent insurance agent
if you only have a couple of you know four unit properties or something like that you can go with

(12:42):
the state farms of the world and that that will probably work for smaller portfolios if you're getting
into five unit buildings or more or larger portfolios it's really time to move to someone who can
shop for you who has access to specialized programs that are for these types of properties an independent

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insurance agent is going to be the one that has that so that would be two pieces of advice
and then if you can get someone who really understands commercial real estate you know I think
that's a big piece if someone like when I'm thinking about a conversation I have with an individual
who's considering purchasing a 300 unit apartment complex I understand what they're doing

(13:24):
I understand where they're putting the number on providing them and most importantly I understand
how big of a deal that number is to their end of their their decision process right when you submit
an L.O.I. when you're going through due diligence and of course when you're now into the asset management
part of your your business plan every line item matters and if you're insurance advisor doesn't

(13:49):
understand that doesn't get that then they're they're going to be more likely to say a number that's
lower because now they're trying to attract you they're trying to fish you in right and get you
to work with them and so what's their motivation going to be well they want to say a number that's
lower what I want to say to clients is a conservative number I want to say a conservative number from
the beginning and I want to say a conservative number for what I believe the increases will be over time

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and so it's an entirely different mentality and if you get roped into the wrong person they're going
to you know decrease your NOI which is the bottom line of the whole thing right yeah absolutely and
I had a conversation with an investor last week who had a fire that took out had an arsonist who
took out two of his buildings on a three building property yeah and he was massively underinsured and

(14:35):
had no idea but he you know he became the victim of the low bid and he listens to this show so
sorry man I'm using you as an example but it is what it is yeah and I think that's a really key point
you know your question before was how do you choose between insurance advisors and I think that
that low bid usually the lowest price is a problem right you want the lowest price on the front end

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because you don't want to pay more than you have to for insurance this is this thing that like
I'll never have to use it nothing bad's gonna happen to me and I hope that's true I hope that is
the case but for those folks like your friend who have to find out did I underinsure it where
their clauses inside the policy that said I would only get depreciated value instead of replacement
cost thousands of dollars that won't get paid out in the situation do I have a wind hail deductible

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that's significantly higher than my other deductible where again tens of thousand dollars are being paid
out that I didn't realize I would I've had I have an example that I use in in classes a lot
essentially where someone had a five hundred thousand dollar claim and in the end got about a hundred
thousand dollars from the insurance company and that was because of all of those clauses and I looked

(15:48):
at what I had offered that person so that person that person had not chosen me but when they got
in that claim situation when they went through that process they came back to me and said hey
for one they asked me for advice during the claim which I thought was interesting but I looked at
the policy that I had offered them which was about 10% more and my policy would have paid out about
four hundred and eighty thousand dollars with a twenty thousand dollar deductible and so it's about

(16:10):
three hundred thousand you know more than three hundred thousand dollar difference and and but
you can't blame the investor because this is a world that is hard to understand it's in legal ease
and that's why it's so important to trust the person you're working with.
Yeah absolutely and I think that you know having an expert that can advise you is super important

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when you build your team your team will make or break you especially in real estate right you use
your cousin Ted who's a real estate agent part time and he works with homeowners he's never going to find
you the residential never real estate that you're looking for as an investor it's just not going to work
out you know maybe he might get lucky and finds you like a lake house you can turn into an Airbnb but
you're going to be buying that at retail you're not going to be buying that you know anything but turn

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key through that guy and that's the same thing with your insurance advisors is the same thing with
your consultants that you bring in your attorney needs to be a full time real estate attorney cannot
stress enough how specialized and fragmented and just broken up real estate is across the country
and every situation is a little bit different but you need somebody who understands it and even if

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they're not familiar with that specific property in that specific market they're in the game enough
where they can figure it out pretty fast absolutely and that's true like you said for I mean you think
about property management right if you think about property management probably the single most
important thing that you make a decision about if you're having property managers come on they're
going to make or break your deal you know those people are all going to say that they know how to do

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what they do so how do you find out if they really do well you ask other people that they manage
properties for you keep you know you trust but verify which is important in all the processes so
I think you've got it right you just really have to make sure that your insurance advisor has access
to the best products has access to the best prices for quality coverage it's actually going to take

(18:01):
care of you with something bad happens right absolutely and you know something bad will always happen
there'll always be that guy you know walking down the street and I use this example because
another investor that I am actually partners with on some storage he had somebody walking by the
end of his driveway and there was a pothole and the guy was like oh look a pothole and he purposely

(18:22):
put his ankle in there and like tried to fall over like five different times had it on camera
watch the guy do it didn't stop him from suing like you can see the guy trying to hurt himself in
a stupid pothole over and over again on camera absolutely and he's still litigating it and it's been a
year and a half like really yeah I mean those clients I have to have thousands of doors I mean every single

(18:44):
one of them has some kind of liability claim going on right some kind of claim usually it's a tenant
usually it's walking out to their car sidewalk a tripping or you know some kind of tripping
heat hazard and they hire a personal injury attorney and you know most of them don't get a whole lot of
money but you still have to be they still have to the the investor still has to invest them defend

(19:06):
themselves and all that kind of stuff so it's just a part of it yeah absolutely it's an ugly part
but you know it costs money people wonder why insurance is expensive people wonder why
you know construction is expensive people wonder why all of these things that impact their day-to-day
lives are so expensive but because we're a litigious society and there's no

(19:26):
loser pays laws were one of the only developed countries in the world that doesn't force the
the loser of a lawsuit to pay all the legal fees and bull crap that goes into defending it I couldn't
agree with you more I think that there's and you know and this is true on the the liability side with
lawsuits and lawyers and I feel like lawyers should just have to you know have some consequences for

(19:49):
filing frivolous lawsuits I think on the property side there's the property the public adjusters
who in some situations can be valuable a public adjuster is someone who you hire to help you navigate
the insurance company in a claim situation and the thing about a public adjuster is they take 20 to

(20:09):
30 percent of the claim payout just like an attorney does in a liability scenario in a property
scenario claims are a lot more clear cut and you know straight forward though and so you see a lot of
public adjusters come in promise the world talk about how insurance companies are awful and terrible
and they're going to be awful and you're going to hate it and and then they get in the middle and

(20:32):
they actually make a ton of money off of the situation and the situation that you could have
navigated on your own or with a good insurance advisor without a public adjuster there's certainly
times when public adjusters are necessary especially if an insurance company is trying to screw you
right think that's a time to get a public adjuster involved but you've got to give your insurance

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company the chance to do the right thing first oh absolutely and a lot of people don't have any
type of industry background to really know that and so what you're sharing right now is going to be
hugely valuable if they listen to the show so yeah I mean in my own personal life just in my house I
had a tree fall on it and they came out and it was meek I think and they're terrible but it is

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what it is and they came out and they looked at it and they were like okay we're gonna give you
a check for three grand mine meanwhile it's a hip roof they were only gonna cover one face yeah
and I've been in industry long enough I called a buddy who specializes in just twoing
fire water and and storm damage restoration for insurance companies he brought his
exacto made on his laptop out and he did the quote he's like two this is seven and a half grand

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eight grand all day long yeah handed that over as an estimate and they're like okay we'll pay it
yeah yes you will thank you yeah and I think that's the other folks there are a lot of
free folks that you can use in a claim situation that are not going to take 30% of the claim payout
right the remediation folks who come in and clean up the water or fire damage things of that nature

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those folks should be knowledgeable about the exactimate system which is a standardized system for
pricing that insurance company professionals and contracting professionals speak the same
language in right those folks can help you the contractors should be knowledgeable if you're working
with contractors in a claim scenario you should be saying hey have you worked with insurance companies
before are you comfortable with the insurance process because it is a specific process some contractors

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want to come in just charge whatever they want that is great that's awesome for them no problem but
is not going to work in an insurance claim right and so you really want to understand who you're
working with through that process oh yeah absolutely absolutely so you and I have talked in the past
about the TCO method and potential for creative underwriting by mitigating risk and all that other
fun stuff that goes into just planning for stupid putting resiliency into your business plan making

(22:48):
sure that you're prepared for the unexpected because it happens and it should be expected in some
cases right like you put water in appliances in a three-story apartment somebody's eventually
going to pull that that stupid refrigerator out from the wall and that little plastic elbow that
feeds the water is going to break off and you're going to have two or three units of flood damage
right drywall and all the other stuff like there's things you can avoid right we call the stupid

(23:13):
tax right there's stupid tax you can avoid what are you advising some of your clients to do right
now that helps them with the stupid tax well I think that it really comes down to how you set up your
risk management system now that sounds really nerdy but all you're really doing you're doing this a ton

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I mean do diligence in and of itself during the acquisition process is nothing but an exercise in
risk management like what are you doing you're going and saying okay what is the risk what is the
risk of the profitability what is the risk to the safety of my tenants what is the risk to the safety
of my employees what is the risk to my pocket book and my investment in this deal you're figuring

(23:56):
out all the risk associated with that given business that given apartment complex or given tall building
office building retail building whatever it is you're looking at and deciding whether it makes sense
for you to actually acquire and get involved in right that's that's a great risk management strategy
that almost every investor has and if you don't you should is your due diligence process from

(24:19):
beginning to end are you going to snake the sewer system right that's a there's a whole there's a
cost associated with that you can check the water lines check you know things that are going out all
of that is risk management absolutely I think that the best thing people can do is just shift their
mindset from the idea that they're trying to get away with the cheapest thing in the world to how

(24:41):
can we balance taking care of our tenants taking care of our employees and taking care of our pocket
books at the same time if we put a hand railing into a staircase and that helps an older person get
up and down the stairs in a safe way that of that yeah sure that avoids a lawsuit absolutely
but also make sure that person doesn't actually break their leg make sure that person actually

(25:04):
doesn't have to stay home for three months and not go to work because they hurt themselves at your
property right I mean things are going to happen but your strategy with your property around safety
is is is not just about money it's not just about some insurance company wanting you to do all these
things so you know whatever it's about the safety of the entire ecosystem and I think that mindset

(25:27):
it is really key it is I agree completely I can't tell you how many due diligence walks I go on
and they bring me because I look at things that they're there guys don't look at right so I walk in
and I see a yellow smoke detector on the ceiling that's 25 years old I'm like that thing doesn't work
anymore there's no chance zero zero chance that's actually functional well we you know we push the

(25:47):
button in it beeps okay well great so the button works the battery works and maybe it's hooked up
to the central system but when a fire happens it's not going off and it's just there so that's
one of the things like okay you guys have got all of these like they all have to go I don't know
what else to tell you you're not going to like it but it is what it is you're you're going to have
to spend time on this and then all the regular stuff that just breaks down stairways handrails any of that kind of stuff all

(26:10):
of the appliances all of like do you have fire stop cans installed it's something that I've seen
operators who have shifted the captives and maybe we'll talk a little bit about that option but
they've shifted and done a captive program where they're going to eat the first part of that risk
yeah and part of their risk management became okay well I'm I'm going to see apartments and yes we

(26:33):
we supply the appliances but most of the issues we see are happening at the stove so we're going to
just put stove top you know fire stops in on all the microwaves all the range hoods underneath the
cabinet if there's neither of those things and we're just going to tell tenants if their stuff gets
stupid they're they're going to have fire extinguishing powder all over their food and it just is

(26:53):
what it is and they don't care and stuff's good for three years it's expensive but from a risk
management standpoint if they're going to own the first X number of millions of dollars of liability
that they have to rate a check for they probably should have something like that in place so
hmm what else are you seeing people do do diligence is hugely important pre-planning for the stupid
is hugely important what else are people doing right now obviously they're shopping around they're

(27:17):
trying to find the cheapest policies but again it's part of the race to the bottom if they haven't
already experienced the catastrophic loss where their insurance didn't cover them they're just
going to take the lowest thing they always seem to learn through the school of hard knocks so what's
the answer like what else should they be looking at as opposed to just getting bloody at some point
in the future yeah and and so I want to just add on to what you said there because I think I talk

(27:42):
with a lot of investors you know and and when I do the preliminary call with someone to see if
they're the right fit for working with me it's amazing to me how you see two different mindsets
and these two different mindsets are always aligned with successful business owners successful
commercial real estate investors as opposed to folks who are struggling and not getting it done

(28:04):
and the big difference is what you just described there you know having I've had multiple people
who talk to me brag almost about their safety systems like the fire suppression you just talked about
and they just talked to me in this way that's like they're almost I don't want to say they're pumped
about it because that's probably going a little bit too far but you know they're they're really proud

(28:27):
of the safety systems that they put in and of course they know they're talking to a risk manager
so I'm a person who's gonna appreciate it right but these are people who are proud of the systems
that they've put in place proud of the way they take care of their tenants proud of what they're doing
and how they're doing it and of course it's based on a strong fiscal you know system and business plan
those people are successful I would say almost a hundred percent of the people who come to me and

(28:52):
are talking in that way are successful in their business the people who are talking to me about
price who are talking to me about cutting corners who are trying to figure out if there's some
secret way I can get them the cheapest insurance policy in the world those people also tend to not
have successful business plans and so I'm again I'm coming back to it's really about mentality and

(29:12):
it's about you know almost a scarcity mindset versus you know an abundance mindset and I think
having a strong risk management strategy is about abundance but your question is a fair one look
listeners are saying Jeremy can say all this stuff whatever in the end if if insurance doesn't have
a cost that's reasonable it doesn't work for me the deal doesn't work for me and so for smaller

(29:33):
investors I think a lot of the strategies of you know finding the right advisor finding someone who
can find good deals for you by you know at getting quotes from a few folks now generally with
independent insurance agents they're getting quotes for you and if you ask three different independent
insurance agents to get quotes for you they actually step on each others toes and it actually
treats more problems than good things but you know if you're getting a few proposals to make sure you're

(29:57):
getting the right price that's good increasing your deductible and this will get to the captive thing
sort of you know quickly I think you brought it up and I think we should talk about it you know so
an investor when you buy a house a lot of personal insurance homeowner's insurance you have like a
thousand dollar deductible or a two thousand dollar deductible right that can make sense in that

(30:20):
situation for property investors why have such a low deductible you don't necessarily want to make
tiny claims anyway because it's going to affect your premium in the future and so can you increase
that deductible what is your capital situation give you the opportunity to do can you increase it to
five thousand can you increase it to ten thousand as I get to larger portfolio portfolios that work

(30:44):
with me more often can we get to twenty five thousand can we get to fifty thousand right now we've
got a really high deductible you know fifty thousand dollar deductible sounds high but if you've got a
thousand units and you've got a master policy that's over all this stuff you know right you've got
tons of capital that you're not working you know and as it gets higher we start to get into the idea

(31:06):
that you can retain more and more of the risk associated with your properties that's all increasing
a deductible is right right saying I'll take the first five K I'll take the first ten K what happens if
you said I'll take the first million now most your listeners probably saying well it would mean I
would be in trouble right and so that's true but but for investors you know a lot of the investors out

(31:30):
there are spending two three four million dollars or more on insurance premium when you're getting to
that size the question for me is what what would it look like for you to take the first million and this
is where something called captive insurance can really help you because lenders aren't going to let
you take the first million on your own it's not going to work but you can create your own little tiny

(31:51):
insurance company and and say well this insurance company is going to take the first million
dollars and I'm going to put some money in there and if there is a claim the first million dollars
comes out of my pocket right right yeah if there isn't a claim though I get to keep that million

(32:12):
dollars if I don't spend it in that year then I get to keep it right and of course what's that going
to do if I take a million dollar deductible what's that going to do to my insurance cost for everything
above that what's going to make it way cheaper and so captive insurance is a great solution for taking
on more of the risk but keeping more of your own money in a way that lenders will accept and works

(32:36):
inside the system absolutely so my my first experience with captives was a very large operator
family office I was working with they're based out of jersey and they had picked up a 24 hundred unit
apartment complex on 256 acres in Michigan and they had to do a captive and so when they built this

(32:59):
there were all these hoops they had to jump through to get compliant with their risk management
strategy at that property and it was a property that had been owned by one dude developed over 30 years
building buildings right through the 80s started in the set that started in the early 60s built
it right through the early 80s and so there were 19 or 20 different unit types and 300 plus buildings

(33:22):
you know golf course pretty cool mine yards was a beautiful property right huge upside because the
rents were way down they bought it for a song so you know it didn't owe them anything right off the
bat they made a couple hundred million dollars just by acquiring the property without even having
to do any work to it so cool yeah but they had to do a captive and so they were going through and

(33:45):
and that was really where the smoke detector thing I was really where I cut my teeth figuring out oh
this the stuff doesn't actually like these old ones they're 40 years old they don't do anything
anymore they don't function so had good advisors there we had good good stuff we had to find a
self lit self illuminated exit sign for every single hallway and every single part of the building

(34:07):
because none of them were there in the cost of hardwired it was astronomical yeah so we were able to
locate a basically a radioactive glow in the dark it was tritium it was a tritium exit sign and we
had to buy thousands of them thousands of them but in the end of the day they saved a ton of money
they they established the captive for that particular property and they were able I think they're

(34:29):
actually using it across their entire portfolio now which is getting close to 20,000 doors yeah
it's a great example and and they're you know if they have a year where they have significant losses
then the captive you know probably doesn't help them a ton right because they're they're losing the
money out of pocket that they would have paid in insurance premiums but the place that a captive
really helps is those years that you don't have as many claims and then you get to you know if they

(34:52):
had three million dollars in insurance premium for that particular property and they were able to
retain a million dollars of that premium and just put it into the captive then if they have a claim
if they have a million dollars in claims well they spent about the same amount of money that they
would have anyway and if they don't then they keep that million dollars can reinvest it and turn
it over that is the beauty of captives the other value of captives is there are some properties

(35:16):
that are just simply not capable of finding standard insurance anymore I mean Louisiana coast is
probably the biggest example a captive that recently I was a part of had a 17 million dollar captive
this person had a ton of capital and they took on 17 million dollars of exposure primarily because

(35:37):
they just couldn't get property insurance for these properties on the coast of Louisiana from anybody
that was reasonable and because they had the capital to do it they essentially completely self-insured
with that 17 million dollars now that's an extreme example but when you're talking about 20,000
units like you just described it's just a bunch of extra zeros on the end and so a lot of things can

(36:00):
happen you know a lot of your listeners this is a far off into the future of their portfolio journey
but you know for folks who have even a thousand doors or or 1500 doors a captive is something that at
least your insurance advisor should be saying why they feel it's not the right option for you if
they're not saying it is right and and again it comes down to who's on your team and what do they know

(36:21):
and how experienced are they in the industry I can guarantee you that the vast majority of people at
my local rhea and that listen to this show aren't there haven't dealt with it unless they've worked
for a commercial real estate brokerage at some point in the past or they're doing like syndications or
something like that now what I've also seen is a lot of these newer operators and not

(36:45):
dissing anybody who's listening to the show but a lot of newer operators have spent the last 10 or
15 years with the ZERP right zero interest rates so money's been cheap a lot of operators didn't
even have cash reserves because the cash was so cheap and easy to get they could just draw it off their
line of credit and pay 3% or 4% anything under 4% is free money you know what I mean yeah so you know

(37:06):
their risk of exposure if they had to tap into some sort of of capital access capital they could just
go to their lender or pull it from their their line of credit that they have at their bank on their
on their business and now that's not the case because suddenly the cost of capital has doubled
so you guess what you have to have cash reserves now you have to be able to plan your capital expenditures

(37:29):
and a lot of them have no experience with planning capital expenditures they have no experience with
estimating timelines for failure on stuff like anything other than a furnace or a hot water tank those
are always the hot ones everybody talks about when they take these guru courses always check the
dates on your furnaces and hot water tanks check the dates on your roof and you know blah blah blah well
that's great but what about all the other crap that has a limited lifespan it's in your apartments

(37:52):
that's in your properties that you're going to need to deal with if you're going to hold this asset
for anything longer than a couple of years like yeah and I think that's where it comes down to your
due diligence checklists is you know from acquisition to asset management right your acquisition
checklist is the first example of what you're talking about but your asset management checklist that

(38:14):
you should be you know you should have your weekly checklist you should have your monthly checklist
you should have your six-month checklist and you should have your annual checklist and you should be
working with your property manager to make sure that either they are doing it or someone on your
asset management team is doing it and if your property manager is doing it there has to be a clear
reporting system so that they can tell you how those things are turning out and you have to make

(38:35):
sure they're doing it you may have to pay a little bit of extra to have your property manager do it
but it's a lot less than you're gonna have to pay if you have someone trip and fall or you know those
kinds of things so right and it's go ahead I was just gonna say it's very important when you're
vetting your property manager that when you want to do extra stuff right when you want to do
extra due diligence when you want to do extra checks extra unit inspections extra risk management

(39:02):
assessments whatever it is changing how your property manager does business every day is going to be
an uphill battle you will never win it's just like when you're in my experience it's been when you're
going out and you are trying to convert you know people off of Sherwin Williams to like another
brand of paint whether it's Benjamin Moore or Glidden or whatever the painters want what they want

(39:28):
and they will find every excuse in the book to not do what you're asking them to do and why this other
stuff is junk and they just want their stuff and they don't want to have to worry about it or think
about it and the conversion costs you more money than anything you would have saved by switching vendors
and it's it's the same thing I think when you're looking at property managers if they're not that

(39:48):
caliber where they're already involved in that part of the process I don't think it's gonna go well
I think that change management is very expensive and most property management companies unless they've
been able to systematize and scale are not equipped to handle any type of change because they're being
operated typically by people who were really good at whatever they were doing and wanted to expand

(40:14):
but don't have any actual experience running a corporate enterprise where where constant improvement
and efficiency is a thing yeah and I think that's where you get into if you what you need more than
anything from every person on your team is clarity if the person if the property manager says look here's
what I do I'm not interested in doing all your extra stuff I'm not interested in all these additional

(40:38):
checklists but I am really good at the foundational things I do we do leasing well we do maintenance well
we do a really good job of this at you know these xyz if that's true that's fine maybe you just need
someone who's boots on the ground to do that for you and has some equity ownership or something like
that maybe your asset manager is in the same town and can do that themselves what you need from every

(41:01):
member of your team from insurance to property management to accountants and beyond is clarity
and with that clarity you can decide how to navigate from there absolutely I think that's great
so I think we're coming up to the tail end we spent about 40 minutes so far and it has been hugely
insightful for me hopefully it's insightful for the audience what else have we not

(41:26):
touched on yet that you think needs to be keyed in on I think we've really dug in I mean we've talked
about the current state of the insurance market it is what it is and we have to realize that we have
to underwrite for it we have to adjust our business plan for it and we have to have really good
advisors that make sure we're getting the best scenario we can we've talked about taking on more

(41:46):
of the risk ourselves for small investors as just a slightly higher deductible for bigger investors
that's higher and higher deductibles all the way to a captive structure where you're actually taking
on large portions of the risk yourselves we've talked about not going for the cheapest
policy because it's going to burn you in the end in the example of the person who chose a 10%

(42:09):
cheaper policy then the one I offered ended up getting about a hundred thousand dollars in a
claim scenario instead of four hundred and eighty thousand dollars a claim scenario and we've just
talked about clarity across your strategy when it comes to team making sure that every member of your
team is clear in what they're doing is capable of handling the piece of the puzzle that they're playing

(42:30):
and they're an A player in the game when I look at my team my business is an insurance agency right I
turn around and look at my team and look at all the players and I look around and I see A players
and they've been some B players and they've been some C players and it's been a little tough to
kind of move and change seats and ultimately move those folks out of the organization but
if you look at your team and you look at A players then you're doing things right and if you're not

(42:56):
looking at A players and you've got to think about how can I start to get A players in maybe you're
newer so it's harder to get A players at that point right so how can I get a B player how can I get
someone who's you know a B player trying to be an A player sort of like a C class property trying
to be a B class property who's coachable yeah who's coachable who can I take in that scenario at some

(43:17):
point as a commercial real estate investor and as a business owner you realize that the primary role
that you play is team manager is you know the person who's making the baseball team you're not
hitting the balls anymore you're not catching the fly the fly balls you're the one finding the people
who are doing that and I think that transition is hard for a lot of people but if you really want
to succeed in commercial real estate you've got to understand that and you got to start building teams

(43:41):
with A players I do not disagree in any way with any of that that is spot on and so I have two questions
the first one is and this is an outlier specific to somebody that I know again they had a I think
was a five family is either four family or five family that partially burned but it was condemned
they found out that they were under insured not because of the value replacement value of the

(44:07):
property but because they didn't have a demo a demolition rider and the demolition for the building
because of where it was in the city was over ninety six thousand dollars right so is that typical
where replacement value is covered and then you have to deduct your your demo value from it or is

(44:28):
there a demo rider you can get put in there to cover removal costs in a weird area where there's
lots of power lines and it's tight and the demolition itself because maybe there's a spestus or lead or
whatever they have to spend extra money for disposal and safely tearing that down is that typical
or is that just something that we see more in the northeast where there's just a lot of lead paint a

(44:49):
lot of a spestus in bull crap well it depends on the policy so insurance policies have endorsements on
them and these are all little additional things some of them take away coverage some of them ad
coverage you know an endorsement will say we won't cover flood which is a common exclusion right that's
an exclusion or an endorsement say we will cover water backup which is when sewers backup but will

(45:12):
only cover it for twenty five thousand dollars not for the entire limit so it's impossible for me to
say until I look at a policy how demolition is handled most quality policies do have that as an
endorsement just sort of built in to the standard policy but if you get into a higher risk properties

(45:33):
again back to the coast because they're just the easiest high risk properties a lot of those things
get stripped out so talking to your insurance advice you know you can't talk to your insurance
advisor about every single thing but again it comes back to quality is it more likely to be in a
quality policy yes if you have a concern you're in a city and you're downtown or something like that

(45:53):
uh you know what about ordinances as well what if you're at building half burns you've got to rebuild but
now you got to put an elevator in because now you got to fit ADA laws where you didn't have to before
well that's making the building better than it was before and that is not included in your standard
building coverage that's included in what's called ordinance and law coverage I think a listener

(46:15):
right now is going wait a minute this is just like it's starting to become too much and I think that's
why you know you just have to back off and trust the team member who's the knowledgeable person
in there you don't go through every single line of your lease you ask your lawyer to help you with it
right you read your lease you surface read your lease because you want to understand it so trust
but verify is my best answer and that particular example should have had coverage in the policy I'd have

(46:39):
to look at the policy to really know right and then I guess the very last thing which maybe is
completely a non-factor all these lawsuits and failed syndications right capital calls all this
insanity going on in multi-family specifically right now from inexperienced underwriters inexperienced
operators capital-ragers and GPs that have no business being involved in commercial real estate but

(47:03):
are doing it anyway what has that done to the costs of insurance and how is that impacting the
industry what are you seeing on your end or is it just a non-factor it's just stupid people doing
stupid things like always and it's the next wave of of grift that we're just going to have to work
through well I'm a passive investor too so I'm involved in a couple of deals at least one right now

(47:25):
that's not doing particularly well so I'm very familiar with exactly what you're talking about
you know it from the insurance perspective I think it affects in the sense that you're more likely
to have lower risk management your motor you know everything we've talked about in this conversation
is done well by good investors by good sponsorship team by people who have done this over and over

(47:48):
again who have systems and successfully do it where are the problems with folks who aren't as good
at it who don't have as much experience who make mistakes and then suddenly there's a fire suddenly
there's a lawsuit suddenly there's something going on there so I don't know that the the experience
is a direct relationship with the cost of insurance but the fact that claims are high anyway

(48:10):
you know more of that inexperience is going to be more mean more claims which ultimately turns around
to higher costs for folks trying to get insurance not exactly a direct relationship though
well I see it in in what I do because most indications if they're if they're doing the typical now
which is the 506 they're only going to hold that for five to seven years right on that's on the

(48:32):
outside yeah so they're planning for immediate returns and immediate immediate immediate return of
capital to the investors so they can pay what they need to pay which means that they're cheaping out
and participating in the race to the bottom on the front which in and of itself increases risk
because they're going to be using cheaper product lower resiliency lower life span lower useful life

(48:53):
the units are going to get beat faster they're going to have to do rehabs and turns immediately after
they dump that asset which means that they're eroding asset value as they go because they're taking
this this thing they took from a sea to maybe a B minus and by the time they're done with it it's
going to be whooped again and it's going to be a sea so for me that raises risk oh yeah and another
example is you know a lot of these 70s bills late 60s early 70s bills you know they're the lowest

(49:18):
hanging fruit for someone who's a new investor the price is really low on them so it seems like a really
good opportunity what you're missing is aluminum wiring that's potentially causing a lot of fires
hand making insurance a lot more expensive you know breaker boxes and a lot of those newer investors
aren't going to invest the capital to actually increase it you know fix it to where it's at safe
and so you get a lot of problems there so this is what I want to do

(49:40):
tell everybody who's listening what your your ideal client is how you can help them where they can
find you so you know my ideal client is someone who embodies the things we've talked about in this
conversation who is a risk manager at heart who has a mentality of keeping their their employees safe

(50:02):
their tenants safe their business safe both financially and physically who has a large
portfolio like I said my minimum is 200 units and so has to be in that larger space and someone who
really wants some creative solutions an advisor who is going to be a part of the team so that's what
I'm looking for as far as where you can find me it's shine insurance.com I actually have for

(50:24):
multi-family investors at shine insurance.com/ballpark a nine yes or no question a ballpark it
advisor that'll give you immediately an insurance ballpark you can use for penciling so that's pretty
helpful bookmark that and just use it when you're penciling deals so that's at shineinsurance.com/ballpark

(50:44):
everything else is at shine insurance.com that is awesome thank you Jeremy so much if you enjoyed
this episode please if you're on YouTube ring that bell subscribe if you were listening on Apple
podcast Spotify Google podcast I heart radio wherever else you get your podcasts please subscribe
leave us a review and leave a comment if you have questions you can email podcastatcomephad.com

(51:05):
please visit Jeremy site check out his awesome tool he's providing for free for everybody to help
them with their underwriting and we'll see you next time
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(51:27):
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