Most sponsors can quote their insurance cost per door. Fewer can say where the number came from.
Usually it came from the seller's T-12. That's a reasonable place to start, but the seller's premium describes the seller's program, and you won't be buying that program.
This guide is for syndication sponsors buying 100 units and up with agency or bank debt. It covers the decisions that tend to cost money when they get made late.
What the insurance line moves
- $80,000
- less NOI when 200 units go from $1,100 to $1,500 a door (illustrative)
- $1.33M
- of value that $80,000 represents at a 6% cap rate
- 7.5%
- Fannie Mae and Freddie Mac named storm deductible cap
- $1M
- Freddie Mac minimum umbrella, up to 250 units
What insurance number should you underwrite at LOI?
Underwrite a per-door figure, and get a real market indication before your hard money goes up.
The seller's T-12 premium can mislead you in three ways:
The seller may be on a blanket. A large owner can spread one portfolio program across dozens of properties. Your single asset prices on its own.
The deductibles may be from another year. An older policy may carry a smaller all-other-perils or wind deductible than you can get today, or a bigger one than your lender will accept.
The values may be wrong. If the seller insured the buildings at a stale replacement cost, the premium is low because the limit is low. Your lender will want full replacement cost.
Here's what the gap looks like on 200 units. Say the T-12 shows $700 a door and a market indication comes back at $1,200:
Illustrative arithmetic, not a market rate
200 units × $500 a door ÷ 6% cap =
$1,666,667
Our multifamily insurance calculator shows what a premium does to NOI, value, DSCR, and cost per unit. Use it to stress the insurance line before the LOI goes out. Then get a broker to quote the real thing during due diligence.
Who should be the named insured?
The borrowing entity. In most syndications that's a single-purpose LLC that takes title and signs the loan, and it should be the first named insured on the property and liability policies.
Agency lenders put this in writing. Freddie Mac requires every policy to list the Borrower as a named insured, and if a property management company provides the insurance, the Borrower has to be an additional named insured on it (Chapter 31, Sec. 31.2(d)).
A typical setup looks like this:
Borrowing SPE or LLC. First named insured. It owns the building and owes the debt, so the policy should insure it.
GP or manager entity. Often added as a named insured or additional insured, so the sponsor entity that controls the deal is covered for claims tied to the property.
Property manager. Typically an additional insured on general liability, since managers get named in the same suits as owners.
Lender. Mortgagee and loss payee on property, additional insured on liability, per the loan documents.
LPs. Typically not named. They're passive investors in the entity, not operators of the property.
A common closing-week problem is a policy written to the sponsor's management company or to an individual, with the borrower left off. Lender's counsel catches it, and the policy needs an endorsement before the loan funds.
Entity structures vary. Confirm yours with your attorney and your lender before the policy is written. This is general information, not legal advice.
What will the lender require at closing, and when should you ask?
Ask for the insurance requirements at term sheet, while there's still time to quote to them. Finding them in the closing checklist leaves you a week to fix whatever doesn't match.
Agency lenders publish their requirements. Under Fannie Mae's Multifamily Selling and Servicing Guide (Part II, Section 501), the maximum per-occurrence deductible for most perils is $50,000 on properties under $10 million of insurable value and $100,000 at $10 million or more. Wind and hail can go up to 5% of total insurable value. Fannie Mae and Freddie Mac both cap a named storm deductible at 7.5% (Fannie Mae Section 502; Freddie Mac Chapter 31).
Freddie Mac also sets umbrella minimums by unit count: $1 million up to 250 units and $2 million for 251 to 500 units, on top of $1 million per occurrence and $2 million aggregate in general liability (Chapter 31). A 300-unit deal priced with a $1 million umbrella is short before anyone looks at the property.
Bank and debt fund lenders write their own lists, usually in an insurance exhibit to the loan agreement. The commitment letter or term sheet is your earliest look. Get the exhibit, send it to your broker, and have the quote built to it. Our lender insurance requirements guide covers the full list, and the named storm deductible guide covers what fails agency review on the coast.
Can one policy cover several syndications?
Yes. A blanket or portfolio program can insure several LLCs under one policy, and it can buy more limit for the money than each deal could alone. It also ties deals together that have different investors.
Shared limits. A blanket limit or a named storm aggregate is shared by every property on the schedule. If two Gulf Coast deals take hits from the same storm, they draw from the same limit, and those deals may have different LP groups.
Premium allocation. Someone has to decide how the premium is split between deals. Write the method down, by values, units, or modeled loss, so every LP group can see how its share was set.
Lender acceptance. Each lender has to accept the blanket. Fannie Mae allows a deductible up to $250,000 on a blanket limit (Section 501), and both agencies test the named storm limit against the largest property on a blanket (details here).
Leaving the program. When one deal sells, it comes off the blanket. The deals that stay may get repriced on a smaller schedule.
A blanket can be the right call for a sponsor with five or more deals. Price it against standalone programs before you commit. More on how we structure them on the portfolio insurance page.
What does a renewal increase do to the deal?
It comes straight out of NOI, and your value moves with NOI at your cap rate.
Take a 200-unit deal underwritten at $1,100 a door. At the first renewal, the market comes back at $1,500.
Illustrative arithmetic, not a market rate
200 units × $400 a door =
$80,000 less NOI
Now the loan. Say NOI was $2,400,000 against $1,850,000 of annual debt service. That's a 1.30x DSCR. Take $80,000 out of NOI and it drops to 1.25x. On a loan with a 1.25x covenant, the deal is sitting right on the line.
On $20,000,000 of LP equity, the same $80,000 is 0.4 points off cash-on-cash.
All three steps of the plan happen before the renewal date:
Start at 120 days.
That leaves time to market the program, compare deductible options, and see the number before your DSCR test date.
Find the test date.
Your covenant may be tested on trailing or forward NOI. That decides when the increase shows up. Our DSCR covenant guide walks through it.
Price the trades.
A higher deductible lowers premium but may run into your lender's cap. A blanket may help or may not. Each option has a cost somewhere else.
What should you tell LPs after a loss or a rate increase?
What happened, what it costs against the pro forma, what you're doing about it, and when they'll hear next.
What happened. The market moved, a loss hit, or the lender changed a requirement. Say which one.
The dollar impact. Underwritten insurance cost, actual cost, and the difference in NOI and per-door terms. LPs read the pro forma. Give them the line they're looking for.
What's driving the price. Cat exposure, the loss history, building age, the deductible. A sentence on each that applies.
The plan. What you're changing this year, and what you expect to change over the next few renewals as old losses age off.
The timeline. When the next update comes and what it will cover.
A renewal increase is easier to explain when you know what drove it. That's most of what I do at renewal: break the number into the parts the underwriter priced, so you can pass that along to your investors.
What should you send for a quote?
The faster an underwriter can see the building, the faster you get a real number. Send these at the start of due diligence:
Statement of values. Every building with year built, construction, square footage, roof year, and replacement cost. Start from our SOV template.
T-12 and rent roll. Underwriters use them to size business income and check occupancy.
Five years of loss runs. Underwriters typically ask for five. They come from the seller's carrier or agent, so put the request on your due diligence list early.
Lender insurance requirements. The exhibit from the term sheet or loan agreement, so the quote is built to it.
Closing date. Quotes take time, and coastal carriers stop binding new wind coverage once a named storm is approaching.
Current declarations pages. The seller's dec pages show limits, deductibles, and forms in place today.
Our insurance document checklist covers what to keep on file once you own it.
Under contract, or about to be?
Send me the rent roll, the seller's T-12, and the lender's insurance exhibit through our program review. I'll come back with what I'd underwrite per door and which lender terms need attention. Or book 20 minutes and we'll go through the deal on the phone. For more on how we insure apartment communities, see multifamily insurance. The acquisition guide has the week-by-week timeline from LOI to closing.
This article is for general educational purposes only. It isn't legal, tax, accounting, or lending advice and doesn't create a producer-client relationship. Policy terms, exclusions, and availability vary by carrier, state, and property. Only the policy actually issued determines coverage. Regulatory and lender requirements change; confirm current rules with your attorney, lender, or servicer before relying on anything here.