A Sharp Lawyer, Gobs Of Insurance And Strategic Site Selection: How To Insulate Properties From Future Storms
South Floridians will never escape hurricanes entirely, but they can take steps to brace themselves against the risk. In conversations with Bisnow, several real estate professionals offered tips on how to best insulate projects from big storms. The magic formula? An ultra-sharp lawyer, loads of insurance and impeccable site selection.
Marcus & Millichap Senior Managing Director for Investments Alex Zylberglait has been advising high net worth individuals and other investors for 14 years. He stressed the importance of a highly skilled attorney who can build protections into contracts.
It is standard to include a “force majeure” clause that relieves parties from carrying out their contractual obligations. Typically, this covers natural disasters and “acts of God” – but it is good to specify.
“Courts tend to interpret force majeure clauses narrowly; that is, only the events listed and events similar to those listed will be covered,” law firm Venable writes on its website.
Zylberglait said that buyers, especially those doing business during hurricane season, might also ask for inclusion of a clause that triggers an extended due diligence period for a significant weather event.
“Some contracts have language providing for an automatic extension in the event of a named storm,” Zylberglait said. Other contracts, he said, specify that if damage exceeds a certain dollar amount, the buyer can cancel without consequences.
On the flip side, a seller may want to cancel a planned deal if, for example, she could collect an insurance policy and make significant improvements she had not otherwise planned on making, and sell later at a better price. Zylberglait said landlords, especially owners of retail or office space, should make sure they are properly insured and should consider buying business interruption insurance.
"[Sometimes,] if tenants can't sustain the damage, they just walk out of the building,” Zylberglait said. “The landlord loses tenants. They need proper insurance to be compensated for that.”
Franklin Street Insurance Services Senior Director Evan Seacat agreed that insurance is a key consideration. His office insures almost 30,000 units in Florida. He said that buyers should factor in the long-term costs of insurance at the time of purchase. Whereas costs like electricity and payroll are relatively steady and easy to project, insurance prices can fluctuate more wildly.
“Eight years ago, property rates in South Florida were over double what they are now. They have come down after eight or nine years with no hurricanes,” Seacat said, but that trend could reverse and prices could shoot up again. “At the end of the day, you've got to carry insurance no matter what the price is."
Seacat said he is hopeful that insurance rates would not rise exponentially after Hurricane Irma, but he expects big changes to come to the Federal Emergency Management Agency and National Flood Insurance program.
"With Superstorm Sandy, and [Hurricane Harvey in] Houston, there's going to be billions in payouts," he said. "Now from Naples to the Keys, I would expect legislative changes and potential increases on the flood side down the road, because they have to come up with the money from somewhere.”
Consequently, Seacat said, investors should be cautious about projects in flood zones. Usually, lenders require that such projects carry significant insurance. But sometimes, no lender is involved, and developers opt to self-insure wind and flood risks, he said. As Hurricane Irma approached, he said, he had about 10 clients call and try to add wind coverage at the last minute, but insurers were not binding policies at that point.
“That is something we are going to be really studying — the risk of not having coverage versus having it,” Seacat said. “We have been lucky the last 12 years. A client called me yesterday and said, 'this is it; things are changing.' He owns 50 units in South Florida.”
Seacat said increasing insurance costs may make it more difficult to execute projects along the coast, and some insurance companies may opt to no longer offer coverage on barrier islands at all.
Rodrigo Azpurua, CEO of Riviera Point Development Group, has a more bulletproof solution: build inland.
“Not being on the coast, the suburbs always have less impact,” he said. “Winds make damage, but water makes more damage.”
Riviera Point has three office buildings in Miramar and is currently building a Radisson Red hotel (a brand focused on art and music) near Miami International Airport. The company plan is to build a portfolio of 1,500 hotel rooms over the next five years.
“If we find a market need inland, and can feed it it with a projected $15M to $30M, we go for it,” Azpurua said.
Azpurua said that he is thought about commencing projects closer to the beach or in the Florida Keys, but was always turned off by the risk. In the design phase, he incorporates asset protections like impact windows, generators and hardy landscaping, which can all minimize risk.
Instead of focusing on attractions like the beach, he considers other institutions that draw people and chooses sites accordingly. Miramar is just north of highly populated Miami-Dade county, in less-pricey Broward, so it is ideal for offices, he reasoned.
“When we go through the construction process, through structuring, everything that needs to be done to build in the first half-mile from the coast, there are so many challenges, which you can avoid when you go inland,” Azpurua said. “Like the water levels, the flood levels. The holding costs of being inland are less, so we get more return on our investment.”
Another of Azpurua's methods: securing funding from foreign investors through the EB-5 visa program. The promise of green cards is a powerful lure, and his investors have stayed committed to projects without wavering over hurricane concerns. Azpurua said that his initial projects relied 100% on foreign investment, but that has dropped to 33% with his latest.
Echoing many developers who have remained optimistic after Hurricane Irma, Azpurua said he is still committed to Florida despite the risks that come with the territory. He believes that tourists and buyers will continue to come.
“Fortunately for all of us, people have a short memory.” he said. “We're going to be fine.”