HOW TO RUN YOUR BUILDING!

Paula Chin: Welcome to Inside Track, a conversation with New York's leading property management executives. I'm Paula Chin with Habitat Magazine, and my guest today is Michael Feldman, chief executive officer at Choice New York. Insurance premiums have been rising and coverage shrinking, which poses a huge challenge for boards.

Not only is property insurance becoming a higher percentage of overall expenses, but the cost can't be spread out since boards have to pay the entire annual fee upfront. The good news though, is that there is a workaround that can lessen the sting. Michael, you've dealt with several buildings facing this problem.

 Before we talk about that, can you start by explaining what the hard market is and its impact on boards? 

Michael Feldman: Both property and casualty directors and officers insurance, crime first and third party, often called Fidelity Insurance outside of New York-- that's all ballooned, with double digit increases to the premiums on an annual basis for several years now.

So that obviously has a compounding effect, which underscores the need for this product. 

Paula Chin: Now, is that because more claims are being filed and obviously companies are unwilling to pay out? 

Michael Feldman: It's probably for a lot of reasons, I'm certainly not an actuary, but I believe there was a change to the New York State law in terms of what can be filed as a legitimate claim several years ago, which was one of the instigators of the increase that we've seen. There are many reasons, but certainly, yeah, the fact that, these insurance companies are out to make money, like all for-profit companies, and not just the number of claims, but the, I think the amount of the monies being paid out, the amount of the defense in aggregate, it's added up to the need for higher premiums.

Paula Chin: Now speaking of the premium, since you do have to pay your entire annual amount upfront, I understand that there is an option for boards to not do that and obviously help them out budget wise. Can you tell us how that works? 

Michael Feldman: Sure. Essentially when you really take a step back and look at your overall expense budget, virtually all the costs are monthly.

The only exceptions to that are your property taxes, which you cannot finance. And your insurance premium is an annual cost. Instead some condo and co boards look to finance that cost. It's really falls under the the umbrella of micro financing, because it's not, for example, analogous to your co-op underlying loan, which would be several times larger, but instead by financing it, the premiums are higher than you would get on something like your conventional primary home. The collection rate on these are virtually a hundred percent; no one lets their property insurance lapse.

It's more that the lender has no collateral other than your promise to pay. But the way it works is essentially the board would enter into a promissory note and agreement. It's a one year agreement. The term is really nine or 10 months typically, where the association or corporation's paying a two or three month down payment of the premium and then the remainder is financed over the course of that year. And so even though the rates are slightly higher right now, they're low double digits depending on your preferred lender. You know, the difference in a couple of percentage points, not to dilute the value of a dollar, but on a hundred unit building might only be several hundred dollars in actual insurance interest.

And of course that's divided by a hundred people over a 12 month period. It's an attractive product for obviously any condo or corporation that has short-term cash constraints. But even for a condo or co-op that just wants to say, Hey, we have a steady way to spread out these payments over a period of time. 

Paula Chin: So, just so that I understand it, a board would take out essentially a loan from a separate lender. There is an interest rate on this. You said you sign a promissory note. What does that mean then for the board? 

Michael Feldman: It's essentially a legally binding promise to the borrower to pay back the lender. It typically has recourse in the event you do not pay. Recourse, in this case, it's not like it's collateralized on real estate or underlying value of the land, of the co-op, for example, or anything other than essentially it provides recourse for the lender in the event of default.

Again, it's virtually 0% on our own product. We haven't had a single late payment ever because again, having your insurance lapse and there's warnings, et cetera. But it just allows the lender and or requires the borrower to cancel the policy. Beyond that it's a pretty straightforward, simple product.

Paula Chin: And does the loan come to the board monthly? So it can, is it, or is it the total sum upfront and then as you said, there's a certain period or is it a monthly payment then that the board pays back to the lender? 

Michael Feldman: It's a monthly payment over again, nine or 10 months typically that the borrower being the.

Condo association or cooperative corporation pays back monthly inclusive of the interest in principle over that period of time. So from the borrower's perspective, it's quite attractive that they can essentially defer this payment for, it, it, putting aside the actual interest rate because it's short term and not a 30 years of interest.

It's generally a very palatable amount relative to the scale of the building, to be able to just have that consistency of monthly payments. 

Paula Chin: Michael, can you give me an example or two of a building that has done this and how it worked out for them? 

Michael Feldman: Sure. We have a building in Edina, Minnesota. They borrowed $540,000 in change at a 9% and change interest rate. It's 138 units. Prior to them extending this loan, before they came to us for this product, the client's broker was trying to get them a loan at 16 plus percent. The borrower typically renews and borrows every year. So their previous loan was 16%, so the way interest works, it's almost double the interest that they were paying relative to when they came to us, it was halved almost.

Closer to home here on Linden Street, we had an HDFC that was property management client of ours. They came to us for a loan. They're actually renewing from the previous year. The loan amount was a little under $25,000 at an interest rate in the high single digits. It's a 23 unit building. So the total annual interest is only a couple thousand dollars, but you divide that by 23 units and again, by by 12 months, and it amounts to a few dollars a month per unit of interest costs to avoid having to pay a total premium since there's a down payment, it would be close to $30,000, and just allowed this board, a lower rate and a low cost option to properly insure their homes and thereby protect their most valued assets.

Paula Chin: You mentioned that they came to you. Is a lender typically a management company, or does one go outside and how would one find a lender? 

Michael Feldman: Sure. There's one national lender that has, at least as far as I understand it from my non-scientific question in the real estate board of New York's residential property management third party committee, which is quite a mouthful.

And everyone uses that one lender. And so that was really the impetus to our product. We call it Premium Property Insurance Financing. And as far as I know, we're the only property management company in New York offering that. We've actually had to recapitalize our debt or we're borrowing to then lend like virtually every other lender in the world in today's modern, sophisticated financial society.

So we've had to several times go and increase our own line of credit because it's been such a high demand product. 

Paula Chin: Now typically , when a board goes to a lender, whether it's you or this other lender that you mentioned, do they pay part of this annual premium down upfront, and then you guys pay, say the balance?

How does that work? 

Michael Feldman: Yeah, and that's part of why we're able to offer it is because. If they're paying two or three months, in other words 16.6 or 25% of the annual premium upfront, the cancellation period , because you're only paying for earned premium, is set differently. Meaning if you don't use the premium, you don't pay for it.

So if we cancel, typically takes about six to eight weeks to return the policy. We never have had to cancel. But depending on the carrier, it could take maybe 10 weeks. But from that standpoint, we're never actually out of the equity, if you follow. So the risk is really remote. I don't know why every company's not offering this. Obviously there's some capital that's required to be able to lend out money to clients separate from our core service being the property management.

But yeah, I mean it's it's been extremely popular where other management companies, friendly competitors are helping us. Legally, we're allowed to offer a $200 basically broker fee for finding it, is the maximum we're allowed to offer in New York State. So that's what we provide for the deal finder.

And that's all disclosed, fully on the on the documents, of course. But really, it's hate to sound like a used car salesman, but it's really that simple. 

Paula Chin: Is this $200 fee that you mentioned, is that something that Choice charges when you guys find a lender or is that what you charge when you in fact are the lender?

Michael Feldman: It's not what we charge, it's what we pay out to the deal finder. The lender pays a $200 basically commission to whoever brings in the deal. That's the maximum allowable by law. 

Paula Chin: Okay. And obviously whenever you manage your property, you would hope that board would turn to you as the lender for this payment.

And what's the incentive for them? Do you guys offer a cheaper quote? 

Michael Feldman: It's really, when you think about, it's such a commoditized, simple little micro lending product, right? As much as the premiums have gone up, it's still a thousand dollars roughly per unit, give or take that they're borrowing over the course of a year.

So $83 a month. So it's not nothing, but really we're just looking at what our main national competitor is charging and we're just charging one to 2% less than that. For a Choice New York client, we charge a little even less just as a value add. But really it's more of a value add for property management companies to be able to offer to their clients and for condos and co-ops to be able to manage their financing.

Obviously, we went and found a micro financing attorney that, that specializes in preparing the documents. And so there are documents, but we provide a couple of quotes and one of them is from the national and our quote just happens to be less every single time.

Paula Chin: Michael, what would you say the takeaway for boards here? Everyone, like I said, is dealing with these insurance hikes and finding the money to pay for it. 

Michael Feldman: Yeah, look, if you're well capitalized, this product is probably not something that's needed. It's not the cheapest debt, even though it's a small amount.

But if you're not as well capitalized and you need the money, obviously it's there 'cause you cannot have your building not properly insured. That's obviously a complete non-starter. Or even if you're just trying to manage your cash flow better. It's different when you're an individual versus you're running essentially a nonprofit for others which is essentially a business.

You really don't want these lump sum payments, especially for more experienced board members, they come to realize that the consistency and the lack of uncertainty of being able to say, okay, here's what's gonna be the monthly payment every month. You don't have this giant one time charge, which tends to create a lot of questions, whether it's from the accountant who maybe is not familiar with it, to a shareholder it's just a means to better manage your cash flow. 

Paula Chin: And I would imagine that it helps them in terms of timing and that it's very difficult for boards to plan for this increase ahead of time in their budgets, since, as I understand it, insurance companies are hitting you at the very last minute with these in increases. Is that right? 

Michael Feldman: Yeah, and that's not by chance either.

I don't mean to paint the insurance companies as, big, bad, evil, but they're running businesses also. I think it's a common misnomer that insurance companies are unfair to borrowers. They actually are quite fair. They just expect that the borrower is a smart, prudent consumer, and they're not always so smart.

And everyone's busy, of course, with their own lives. That's a general statement, but in terms of the timing you correctly allude to, that's a different ballgame where I would say that's more by design, that they're not giving borrowers or premium payers, the beneficiaries the benefit of time to shop around, et cetera.

And just the calendar creep of time. It is another mitigator that you can use the financing when you have these large increases to dilute the pain, if you will. 

Paula Chin: Right, so boards at least can feel somewhat, like I said, less of a sting when they get that almost inevitable shock at the last minute. 

Michael Feldman: Sure. That's correct. You nailed it. 

Paula Chin: Michael, this has been really informative. Thank you so much for joining us today. 

Michael Feldman: Thanks, Paula.