Multifamily Lender Compliance Checklist: Insurance Requirements Before Your Loan Closes

Closing a multifamily transaction is not always just about negotiating the purchase price and financing terms. Lenders analyze all sources of risk when providing the loan, and insurance ranks right up there at the top. 

Having your multifamily insurance lender compliance for properties lined out prior to closing can be the deciding factor in a successful funding experience or a costly one. This checklist outlines what lenders expect from you and why it is so important.

Why Is Insurance Important Prior to the Close of a Multifamily Loan?

The lender views insurance as being an instrument for protecting the collateral, not as just a mere formality. In case the property gets damaged from a fire or any other incident, then the security of the lender is only as safe as the insurance behind it. This explains why lenders will review the insurance coverage, its limitations, and the policy language before releasing the funds.

This explains why the owner cannot treat insurance as something that he adds to the property at the last minute before closing the loan. Insurance should be arranged well ahead of time, matching the loan's requirements and having confirmation from the insurer that everything is in order.

Documents That Lenders Require for Insurance Compliance

Generally speaking, most lenders would require a set of insurance documents to be provided before they agree to finance any transaction, even if it is for commercial property insurance in Georgia. Although the documents might differ slightly from one lender to another, the following documents would be required anyway:

• Documentation of Property Insurance (ACORD 28) for replacement cost coverage.

• Commercial Property Insurance Documentation (ACORD 25) for general liability coverage.

• Declarations Page of each insurance policy currently in force.

• Loss Payee/Mortgagee endorsement with proper notation for each lender.

• Documentation of Flood Insurance Coverage, if applicable.

• Documentation of Business Income/Loss of Rents.

Not having one single document from this list will cause significant delays in the closing process, which is often very limited in time. The owner who prepares these documents in advance before getting the list from the lender will generally close on time.

How Much Insurance Does the Lender Want?

The lender will typically want to have insurance for the entire replacement cost of the improvements, not the market or purchase value. This confuses many first-time multifamily purchasers because of the difference between replacement cost and appraised value. This can be quite an issue based on the building construction type, number of units, and labor/material costs.

Deductibles play an important role as well. Lenders may set the maximum allowable deductible percentage of the insured amount at a certain level. If the deductible amount is above that level, there is potential for red flags. It is always wise to coordinate the deductible amount and limit with the lender's guidelines prior to committing to the policy.

What Else Does the Lender Need?

In addition to just having some basic insurance to protect their investment, most lenders look for more than just that. Common additional insurances include:

• General liability insurance based on the number of units and amenities.

• Loss of rent or business interruption insurance based on the loan period.

• Ordinance or law insurance if it's an older building requiring improvements.

• Umbrella or excess liability insurance in addition to primary insurance.

• Boiler & machinery insurance if they have a central system.

• Terrorism or wind & hail insurance if they have a geographic risk.

Each and every one of these types of insurance affects whether the lender thinks your file is complete. If you miss one or forget about one, you will be surprised how often that ends up being the very reason the underwriter rejects your deal at the last minute.

What Makes Georgia Property Insurance Special?

Georgia has its own list of underwriting factors to consider. Properties located along the coast or near the coast have higher exposure to winds compared to their inland counterparts. At the same time, properties located anywhere in Georgia experience the threat of seasonal severe storms that make insurers more cautious about pricing risks than elsewhere. When lending money for property insurance in Georgia, the lender may require storm-related endorsements that would not be considered in other places with a lower risk factor.

The local building codes and permit requirements influence the speed of recovery and, as a result, affect the process of pricing the loss-of-rent coverage. Those owners who cooperate with a broker familiar with the local regulations and weather conditions will be able to get the policy more easily because the broker is aware of those carriers that have no problem underwriting multifamily risk.

Insurance Policy’s Noncompliance with Lender Requirements

In cases when the insurance coverage does not comply with the requirements set out in the loan documents, the lender will issue a noncompliance letter and provide the borrower with a deadline by which they need to fix this problem. At best, it could be a speedy endorsement or a new certificate issued. At worst, it means delaying the closing process in order to get the right policy and the appropriate carrier.

Noncompliance can lead to a force placement of the insurance, which happens when the lender takes out the policy on behalf of the borrower at a significantly higher price. It is among the most costly scenarios that an owner can end up in, and it is completely avoidable with the right preparation prior to applying for the loan. 

The Lender Compliance Checklist Starts With Compliance

Multifamily insurance lender compliance does more than ensure your loan doesn't face unnecessary roadblocks; it ensures that your asset remains protected throughout and after the closing process. Owners who view insurance coverage as a valuable element of the deal tend to be those who never run into delays due to non-compliance issues.

As a company that excels in such a niche field, Moore Multifamily offers insurance programs that are tailored precisely to asset needs, not just modified residential programs used to fit apartment portfolios. Being a specialist that deals only with commercial apartment owners, property managers, and asset managers, we know all of the nuances of insurance coverage and lender requirements.

For those who are closing and need a fully compliant insurance program, contact us today and get a free estimate.

FAQs:

When should I begin the process of insurance compliance?

The majority of brokers suggest beginning at least 30 to 45 days before the closing date to have enough time to collect quotes, determine the lender-specific endorsements, and fix the holes in the policy that will be identified by the underwriter.

Will my existing insurance policy cover the acquisition of a multifamily property?

Sometimes it can, but the policy will need to satisfy all the limits, deductibles, and endorsements that the new lender requires. Usually, in cases of acquiring a property, the existing insurance policy will have to be updated or changed.

What is the difference between the replacement cost and market value?

The replacement cost is the cost of rebuilding the property now with current materials and labor costs. Market value is the value that would be paid for the property by a purchaser. Lenders always request coverage based on the replacement cost, which is more expensive than the purchase price.

Is the insurance documentation the same for every lender?

Not necessarily; agency lenders such as Fannie Mae and Freddie Mac tend to have more detailed checklists compared to regional banks and other lenders, so it is best to clarify the list beforehand rather than assuming that one template would work across the board.

How do I proceed if my insurance company does not offer a certain endorsement required by my lender?

It is better to find a broker working with several companies to make sure that you will be able to obtain an endorsement, since there may be some endorsements such as wind or ordinance coverage that are not available at every insurance company.