More than two months after Hurricane Sandy smashed into New York City, some Lower Manhattan landlords are being forced to reach into their own pockets — in some cases deeply — to pay for repairs to their buildings.
That’s because while insurance companies are footing the bill for hundreds of millions of dollars in damages to elevators, electrical systems and other infrastructure in hard-hit buildings, the carriers are not covering all the damage.
One insider estimated that about a quarter of the large commercial building landlords who were hardest hit by the storm have already maxed out their flood insurance payouts, and have to pony up the difference themselves. In some cases that can cost well over $1 million.
“We have seen examples of some customers with just $5 million in flood coverage,” said Alfred Tobin, managing principal at global insurance brokerage Aon. For those whose losses were greater than that, “they’re out of pocket.”
In addition, many of those building owners are being forced by clauses in their mortgage agreements to purchase additional flood insurance to cover them for the remainder of their annual insurance policies.
As a slew of Lower Manhattan buildings have struggled to become operational in the wake of Sandy, the insurance issue has been looming over the heads of landlords. While it has been quietly discussed, and speculation has swirled over what impact Sandy will have on insurance rates, very few conclusions have been drawn so far.
But what is clear is that while insurance premiums are likely to go up in the long term by a modest 10 percent to 30 percent, they are spiking much more dramatically in the short term for the hardest-hit buildings. Some Lower Manhattan owners are receiving quotes that are triple their current rates.
And some of those building owners, unable or unwilling to pay the higher numbers, are forgoing flood insurance for the remainder of their annual terms.
In general, owners in Lower Manhattan are caught in a financial squeeze, being hit not only by rising insurance payments, but also by a halt in cash flow from displaced office tenants who didn’t pay rent. In addition, while some tenants are trickling back into their buildings, others are sniffing around to see if they can break their leases (see related story, “Lemme out”) or further delay their return.
A line item
Before Sandy, many landlords gave only a cursory glace at insurance payments. That’s because, relatively speaking, the payments are not a lot of money compared to a building’s larger fixed expenses, such as taxes, which can swallow 25 percent or more of revenue — or even janitorial, utilities or maintenance, which are all generally higher.
But the importance of insurance will likely increase for landlords, and not just because of damage. The Real Estate Board of New York, the city’s leading real estate trade group, is keeping an eye out for the redrawn 100-year flood boundaries that the Federal Emergency Management Agency is developing.
“There will be properties now in that zone that were not before, and that will no doubt affect their insurance premiums,” said Michael Slattery, senior vice president at REBNY.
Before Sandy, insurance for Downtown’s big towers was pretty straightforward. For example, 4 New York Plaza, the 1 million-square-foot tower that has been shuttered since the storm, had an annual insurance premium of $625,898 in 2011 — or about $0.59 per square foot, according to mortgage tracking firm Trepp.
Insurance professionals told The Real Deal only about $150,000 of that was likely related to flood insurance. That’s not a big slice of the pie for a building with total expenses of more than $13 million in 2011.
Those types of premiums gave most large office buildings Downtown at least $5 million to $10 million in flood insurance coverage, said Andrew Marks, a senior executive vice president at the New Jersey–based Bollinger Insurance, which has offices in Lower Manhattan.
However, as Aon’s Tobin noted, those policies did not cover enough for some landlords.
Those landlords who have hit their payout limit are put in a tough position. If they’ve used up their payout allotment or a significant portion of it — then the owner needs to purchase a so-called “reinstatement,” or an additional policy that will carry him through the remainder of his term. Unless, of course, the landlord opts to go without coverage.
But reinstatement coverage is proving to be extremely expensive.
Walter Harris, a vice chairman and senior managing director of the Commercial and Corporate Risk Group at the Manhattan-based Alliant Insurance Services, estimated that for a hypothetical, 1 million-square-foot office tower in the flood zone, a $150,000 annual flood insurance premium would have now spiked to $500,000 for $5 million of coverage. (It would cost $1 million for $10 million in coverage, he said.) While not an enormous amount compared to the millions of dollars in other expenses a landlord faces, that’s an increase of up to 560 percent, depending on the total coverage.
Furthermore, many U.S. insurance companies are not willing to provide the reinstated coverage, saying they can’t afford the additional exposure, so the landlords are forced to look overseas.
“They [are going] to the London [insurance] market,” when they can’t get insurance stateside, said Harris. “The London market has taken the point of view of, ‘You take our terms. If you don’t want to buy it, fine.’ ”
Some landlords are willing to take the risk of not buying new insurance.
“It is something a lot of people are wrestling with: Are they comfortable going naked versus do they put new coverage in place if they have exhausted the aggregate limit?” said Andrew Lance, a Manhattan partner in the real estate practice group at law firm Gibson, Dunn & Crutcher.
But the market for insurance is expected to flatten out after this Sandy-related crisis passes.
Marks and others said they believed rates for impacted buildings in flood zones would likely rise by about 20 percent to 30 percent in the long term, or flood coverage could be excluded altogether. They noted that rates for buildings that are not in a flood plain were set to rise by 5 percent to 10 percent even before Sandy hit.
Some are looking for avenues other than flood insurance to get reimbursed for damages incurred. But that is not likely to work in Lower Manhattan, sources said.
For example, in Brooklyn, Stuart Price, an attorney, is representing Greater New York Endoscopy Surgical Center, a tenant in the four-story 2211 Emmons Avenue in Sheepshead Bay, that lost millions of dollars in surgical supplies. An insurance adjuster said all the damage was from flooding, but Price is making a case that a hole in the roof was caused by wind damage.
These efforts come as landlords and tenants are battling over who (or whose insurance company) is responsible for paying rent. For example, in some leases a landlord will only give rent abatements if he’s insured for the casualty, in this case a flood.
But sometimes when insurance policies exclude flood coverage landlords will turn to their tenants to make up the difference.
Landlords have not sorted out all the insurance implications.
For example, at 125 Maiden Lane, a commercial condo building owned by Time Equities, insurance payments will in part determine how the company prepares for future storms, whether that be moving mechanical systems out of the basement to above-grade floors or taking other steps, said Richard Recny, director of asset management for the company.
“We have been advised to expect a 25 percent increase in flood insurance,” he said.