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Flood Insurance in Houston: One Year Later

Flood Insurance in Houston
August 2018

Kate Good is among the apartment owners whose properties were damaged by Hurricane Harvey a year ago. The long and winding process continues for her and many others—including the process of submitting claims, receiving funds, finding building contractors, repairing damaged homes and having residents return.

Owners suffered lost rents and often insurmountable repairs, which crushed their bottom lines and have now hit them again through increased rates to gain insurance from companies, including the federally operated National Flood Insurance Program. For those who didn’t hold sufficient flood insurance or who now can’t afford it, the situation remains dire one year later. The hurricane season officially begins this month.

In late June, the U.S. Department of Housing and Urban Development approved a plan of action submitted by the Texas General Land Office for recovery and repair in the wake of Hurricane Harvey. From the overall $5 billion plan, $250 million are earmarked for the reconstruction, rehabilitation and new construction of affordable multifamily housing projects. This will help address the lack of affordable housing supply that has hit the Houston area since the storm, owing to the destruction it caused. Hurricane Harvey dumped 60 inches of rain on Houston during a few days in late August and is considered the single-worst extreme rain event in U.S history.

These funds are eligible for application, up to $25 million per development, by developers, public housing authorities, units of local governments and not-for-profit developers. According to the plan, 80 percent of funds allocated must address unmet need in the HUD-identified ‘most impacted and distressed’ areas. A minimum of 51 percent of the units are 20 or more years of an affordability period for low- and moderate-income (LMI) individuals earning 80 percent or less of the Area Median Family Income (AMFI) at affordable rents. Other conditions apply as well.

“When you look at what the City and HUD has approved, there seems to be help for everyone but those in conventional housing,” says Good, Principal, Multifamily Development and Operations, HPI Properties. “The hurricane did not discriminate who it impacted. Why should the funds?” Good priced flood insurance after the hurricane. She says she found it to be unaffordable today on what she describes as minimal coverage. “We are running as lean and mean as possible but with the cost of debt and insurance going up so much we need to see a stronger rental market and for concessions to decrease. It’s just unbelievable. A perfect storm indeed.”

Can NFIP Be More Effective?

Jerry Winograd, Judwin Realty Group, owned one property in the 100-year flood zone. It was not insured through NFIP and had as much as 2 inches in rising water in 78 of the 225 first-floor apartments. Only two units had more than 2 inches of water. Winograd, who owns 46 buildings, says NFIP coverage for that property would have cost between $400 and $1,600 per building. His property sustained $210,000 in damage and he lost approximately $30,000 in rent. Winograd says he did not buy NFIP coverage because, “given the history and the cost, we felt it was not worth having.” Winograd says his post-Harvey NFIP premium estimate for a community in the flood zone is more than double from a year earlier. “The annual premium prior to the storm would have been $55,000 with a $5,000 deductible per building; the current proposed premium is over $150,000 with the same deductible,” he says.

Lincoln Property Company Vice President Kurt Seidel says that “as primarily a fee manager, we had a variety of coverages relating to flood. Most interesting was that our hardest hit community had only certain parts of it insured based on what was required. It was a large property and only part of it was located in a flood zone.”

The estimated damage to Lincoln Property Company exceeded $2 million and it lost an estimated $125,000 in monthly rents. “We have received money back from our insurance company on about 80 percent of our claims, and some are still in negotiation,” he says. Seidel says he’s seeing a 10 percent hike in premiums post-Harvey. “Our clients and owners are looking at flood insurance, but not all are taking it,” he says. “It’s not mandatory to have it in each particular location if they are not in a 100- or 500-year flood zone.”

North of Houston

As vicious as Harvey was to the immediate Houston area, it’s when the hurricane turned north to the Port Arthur and Beaumont, Texas, area that third-party management company Alpha-Barnes’ portfolio started to collect significant flood damage.

Mike Clark, HCCP, its Principal, says it got so bad that at a 36-unit community had 5 feet of water on the ground floor. “We found a lot of holes in the ceiling and couldn’t figure out why,” Clark says. “Then it dawned on us that refrigerators float, and in those units, the refrigerators were bobbing up and down as the punched holes in what were already dampened ceilings.” This community represented one of seven significant claims Alpha-Barnes filed under its umbrella insurance policy that provided blanket coverage for flood and storm damage. “Because of the scope of the policy (which was divided among four insurance carriers) for $1 billion in risk over our 25,000-unit portfolio, the policy included $100 million in flood coverage for the participating properties,” Clark says. “We had a 2 percent deductible, which seems like a lot, but in the larger scheme of things the good news is that all of the damage was covered.”

The policy is brokered and serviced by the Denver office of the national firm Lockton Companies.

Clark says this umbrella policy flood coverage was sufficient and that none of the assets affected were in flood zones where NFIP coverage would have been required by the participating lenders. Among the reasons Clark cites is that some of its properties aren’t in flood plains, adding, “I don’t think our owners would have opted for NFIP even if we presented it to them since it was not required and these were areas that have never flooded before.”

The total remediation, clean-up, reconstruction and business interruption costs from Harvey damage will total around $13 million spread over seven assets, Clark says. He began receiving insurance payouts late in 2017 and has received about 65 percent of the total as of mid-July. Reconstruction is underway and he hopes to re-occupy the apartment homes by Q4 this year.

“We used Houston-based CAMP Construction for all of the work and they are doing a great job,” Clark says.

Alpha-Barnes’ policy renewed on April 1 and Clark says they were hit with a 30 percent average increase for the portfolio (as high as 45 percent for one community) and he expects rates to go up another 5 percent to 10 percent in April 2019 “because the insurance companies need to and
they can....”

NAA is advocating for improvements in NFIP, including greater private sector participation and better flood mapping. To learn more please visit Flood Insurance issue.

Preventive Action Helped The Morgan Group Recover From Harvey

Although he had 17 communities affected by Hurricane Harvey, all but one of which was in Houston, Morgan Group’s Risk Manager, Chris McGhee, says his company was able to minimize the devastation that crippled many local citizens and businesses.

The Morgan Group carries property insurance that includes flood coverage up to $25,000,000 with a $100,000 deductible. This helps Morgan Group with remediation costs and reimbursement for lost rent. And because of proactive steps to safeguard against severe weather events, McGhee says the estimated total damage for all properties (one was in Austin) was less than $100,000, and averaged about $80,000.

“We were incredibly fortunate,” McGhee says. “And in the few cases where we had to displace a resident because of damage to their apartment, we were able to temporarily place them in another vacant unit in that building, or we accommodated them in a unit at one of our nearby sister communities. All told, our displaced residents were able to re-enter their apartments five to 10 days after the rain stopped.”

 Morgan has a handful of properties with sub-grade parking structures where they have decided to buy down their $100,000 flood deductible with NFIP coverage. NFIP has a $5,000 premium with a $1,250 deductible for a mid-rise apartment building. McGhee calls those rates “a bargain.”
McGhee also credits his company’s decision to install flood gates in the parking lots of its properties that are susceptible to flooding. Each gate costs approximately $90,000 plus installation charges, McGhee says. The gates are manufactured by FloodBreak.

“We have a few parking structures that are half a floor below grade,” he says. “They are an important part of our property because they are home to residents’ cars, our elevator shafts and other expensive equipment. In the event of catastrophic flooding, the gates self-engage and seal the perimeter of the garage to keep flood waters at bay.”

McGhee says another key step is to have a master agreement with a remediation company.

“This way, when big damage occurs, they have their crew out to our property right away,” he says. “We maintain a good relationship with our service providers and have predetermined rates that help to add certainty in an uncertain situation.”