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May 20, 2024

Why Sponsors Can’t Sleep on Insurance and Taxes in Multifamily & Hospitality Deals

So you’re a Sponsor diving into the world of commercial real estate, specifically multifamily buildings, or hospitality ventures. Numbers are crunched, locations are scouted, and excitement is brewing! But hold on there, before you break ground (or unlock the lobby doors), there are two crucial factors that can make or break your deal: insurance and taxes.

Prior to making a commercial real estate investment, one of the most important tasks on a real estate investor’s to-do list is to create a financial projection of the property’s cash flows and Net Operating Income (NOI). This process is known as “underwriting” the property and the resulting financial projections are displayed in a document called a “proforma.

Sponsors act as stewards of investor capital.  By thoroughly evaluating insurance and tax implications, they minimize financial risks, ensure realistic profitability forecasts, and ultimately protect the long-term viability of the commercial real estate projects. There are two key reasons why insurance and taxes are most important for Sponsors in commercial real estate deals:

  1. Direct Impact on Projected Profitability
  2. Risk Mitigation and Long-Term Stability

Owning a multifamily building or operating a hospitality establishment is a complex endeavor.  While the profit potential is significant, so are the risks. Think of Sponsors as the guardians of investor capital. By thoroughly evaluating insurance and tax implications specific to multifamily and hospitality properties, they achieve several crucial goals:

  • Minimize financial risks associated with unexpected events.
  • Ensure realistic profitability forecasts in the pro forma model.
  • Protect the long-term viability of the commercial real estate project.

Now, do you ever feel like your insurance bill is getting heavier by the year? You’re not alone.  Across the nation, and likely hitting your wallet in Dallas too, insurance costs have been on the rise in the past two years.  But what’s causing this squeeze? Insurance costs are rising in the US due to several factors. Extreme weather events, supply chain disruptions, increasing cyber threats, and inflation are all forcing insurers to raise premiums to cover their own rising costs. Global supply chain disruptions are causing the cost of repair materials and labor to skyrocket. Since insurers foot the bill for repairs, the policyholder ends up paying more.

In the fast-paced world of commercial real estate, especially multifamily and hospitality, Sponsors can’t afford to sleepwalk through the due diligence process. Insurance and taxes are crucial chapters for a project’s success. Understanding these factors safeguards your investment, and ultimately, transforms dream deals into profitable realities.

The future of hospitality and living insurance is all about customization and technology. Pre-designed packages will cater to specific property types, data will streamline risk assessment, and the Internet of Things (IoT) could be used for preventative measures, potentially lowering premiums.

In conclusion, the insurance landscape for hospitality and Sponsors doesn’t have to be a maze of frustration. Insurance companies can profit from making valuable partnerships with Sponsors by embracing innovation and prioritizing the Sponsor experience. Simplifying the process for returning Sponsors can benefit insurance companies a great deal.

 

Sources:
https://www.linkedin.com/pulse/investing-commercial-real-estate-heres-why-szo9c?trk=article-ssr-frontend-pulse_more-articles_related-content-card
https://www.coremultifamily.ca/pro-forma-vs-underwriting/

Disclaimer:
The contents of this article are not investment advice and should not be construed as such. Statements herein do not specifically describe any RREAF investment deal in particular. Information about specific RREAF investment opportunities are only contained in the applicable published “Private Placement Memorandum” issuing a given opportunity. Statements on performance may be qualified. Past performance does not predict future success.