April 21, 2020 update: To provide accounting relief and clarity during the COVID-19 crisis, the FASB published an exposure draft with proposals to delay the effective dates for Leases (Topic 842). Find more information here.
Last month, I wrote a synopsis of a recent Clark Nuber-sponsored real estate event. Many topics were covered by our esteemed panel; so many, in fact, that one article couldn’t cover it all.
This article addresses the other issues that real estate asset managers should know about, including insurance risks, disputes, and the state of the industry.
Risk and Insurance
Regarding mitigating risk, Susan Stead of Parker Smith and Feek suggested that you pay attention to general maintenance on your property and understand your tolerance for risk. For example, business interruption insurance may not be necessary if you have tenants under a triple net lease. Making an educated decision on how much earthquake risk to take on can be made if you understand where the fault line is located in relation to your asset. Also, make sure you know what your insurance policy covers. For example, if something catastrophic happens, does your policy cover replacing the building, or replacing it with code upgrades that are required today? Make an informed choice by leveraging the analytics and knowledge that your insurance broker provides.
Susan also had cautionary words about shared insurance programs. The $5K premium can sound enticing, but if you dive deeper, you could find that there are many owners who have access to that money. The question then becomes, how much of that pool do you actually have access to? Make sure you have the coverage that you think you have.
Greg Duff of Garvey Schubert Barer noted that private ADA enforcement has increased. What typically happens is a private ADA enforcement lawyer will look at a building to note any ADA discrepancies. Afterward, you’ll receive a letter from the lawyer, noting the discrepancies and stating they’ll enter in an agreement with you for a set amount of money. Most are valid letters, and some of the issues are easy fixes. However, if it entails a construction fix, then it becomes tougher determining who is responsible – the tenant or the landlord – and even well-drafted leases don’t address this issue.
When it comes to insurance disputes, there’s a fair amount of finger-pointing that goes on. Greg said that, from a landlord’s perspective, the lease provision is only as good as making sure the insurance coverage is there. You need to have your certificates of insurance. Susan added that tenants often resist sending certificates/renewal certificates, but when the claim happens, adjusters will want those certificates. The documentation needs to be easily accessible by the landlord, and it shouldn’t cost most tenants anything to request a certificate of insurance.
The State of the Industry
Bill Pollard, Managing Principal at Talon Private Capital, noted that the local area is not overbuilding, and absorption is continuing to hold. Supply won’t be an issue, though demand could certainly change. Bill said that demand is being driven by Silicon Valley enterprises. However, if those companies contract, where would the downsizing begin – at corporate headquarters or out-of-state offices? Overall, we need to be cautious about relying too much on outside investments. For example, 85% of properties over 100K feet is financed by outside capital (both foreign and domestic). It that precipitates a flight of local capital, and then outside capital flees, where will we be?
As this and the previous article have shown, there are basic steps that asset managers can take to protect their properties, but the outlook shows there needs to be innovation and creativity as tenant requirements change and evolve. Those of us involved in the real estate industry find ourselves in interesting times, and we at Clark Nuber will keep you updated and informed.
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