Commercial Real Estate Insurance – Insights from Harbor Consulting Group

Intro (00:00):
Welcome to the Risk Perspective Podcast by Harbor Group Consulting, where we break down risk and leveraged finance. From acquisitions to restructurings, we help you protect your deals with smart strategic insights. Now, let's get into it.

Roger Barbieri (00:19):
Hey everybody, and welcome to our inaugural episode of the Alliant Specialty Podcast series. My name's Roger Barbieri, Vice President at Harbor Group, and I'm joined by two of my colleagues and co-hosts, Director and AVP, Head of Sales and Harbor veteran, Jeff Evans. Jeff?

Jeff Evans (00:39):
Hello world. Happy to be here. Looking forward to talk a little bit more about insurance.

Roger Barbieri (00:48):
Our president of Harbor Group and also the EVP of M&A for Alliant, Mr. Jon Gilbert.

Jon Gilbert (00:54):
Thanks, Roger, and excited to be here as well. What an exciting year for Harbor Group Consulting and real estate in general.

Roger Barbieri (01:00):
It has been, I mean, talk about an awesome year. One of the things that we want to do is we want to make sure that this is fun, informative, something that you all out there can use in your next deal, your next transaction or just something to tuck away into your back pocket. I mean, who knows, maybe you'll even keep tuning in just because you like the sound of Jeff's voice. But seriously, at the end of the day, we realize that there's a gap right now. Amongst us internally we talk about these things, and there seems to be a void in our sector regarding insurance for commercial real estate loans. We think it's important to talk about it without all that extra fluff. Jeff, I want to get your perspective on all of that.

Jeff Evans (01:35):
Yes, totally. It's been a great year for Harbor Group thus far. We've been getting out a lot more this year talking to a lot more of our clients, getting in front of them, attending more conferences. It seems like as we are out at these events and with our clients, we're getting asked the same questions. So this podcast, we want this to be an opportunity to be able to answer all of those questions at a scale. We sat down as an internal group and realized, hey, we need to be advocates when it comes to commercial real estate insurance. It's our job to educate and empower these lenders and these borrowers and just make sure that deals don't fall apart because of insurance. That's why we want to do this podcast and get in front of more listeners out there who are inquiring about insurance, who don't know what they don't know. And that's why we're here. Like I said, we want to be advocates of the insurance world.

Roger Barbieri (02:21):
Absolutely. Jon?

Jon Gilbert (02:22):
What I'll say is that this year has been incredibly active in terms of having to really drill deep into the insurance on our pre-close loan reviews. It seems as though we've been hard pressed with issues from Florida wind to flood insurance to earthquake to wildfire, and the complications that creates when a lender's trying to ensure that they're protected and a borrower's trying to manage their insurance program and an overall cost budget. That really is all it comes down to because I think both sides here want to be well protected, and it's a matter of how to get to the point where both are protected for the lowest possible cost. There's not just one answer on how to get there. It really takes someone with a skillful knowledge of insurance and a tenured experience to be able to deliver what our clients need in today's market, and we feel Harbor Group Consulting's well positioned in that way.

Roger Barbieri (03:15):
I think to your point, that that knowledge is so important, and because Harbor has the backing that it does, it really does increase that knowledge bench. That's something that, again, like we've mentioned here already, that we do talk about internally and how important that is. But speaking of the knowledge base that we have, let's talk about Harbor Group itself real fast because for a lot of folks out there, we are newer to them, to a lot of the sector though, the insurance sector and the lending sector, we're not. We've been working with a lot of companies for a long time. So let's delve into the history real fast about Harbor Group, just get it out there for our listeners. Jeff, you have been here the longest with Harbor Group. You are the veteran of Harbor Group. Take us a little bit through the longevity and where we are today versus where we were then, and I'll throw one out for you earlier. The dashboard is something we are talking about all these different pieces coming together, and for me that just, you mentioned it before and it just boom, all of a sudden I thought of the dashboard. So take us through Harbor Group and where we are.

Jeff Evans (04:13):
Right now, I would say Harbor Group, we're at a good place right now. I've been at Harbor Group for some time now. Don't want to expose my tenure, but since I've been here, it's been nothing but a great journey. I think we just stand out when it comes to the market. When you think about Harbor Group Consulting, I mean we understand the complexities involved and CRE transactions. We bring 30 years of experience in the game, longest lasting risk advisor in the industry. I think with our extensive knowledge and our expertise, not to mention our great leadership that we do have, I just think that we provide an unparalleled service and great insights. Another thing, we're in it for the relationship part of the business. We don't like to consider ourselves as, the only industry that I know that charges retainer fees are lawyers, and we don't want our lenders to feel like they can't come to us just to get advice or bounce something off of us without there being a fee attached to it. We really want to be advocates in this game, in this insurance industry and really be able to give that knowledge to our lenders and make sure that at the end of the day, they know that they're protected when it comes to these CRE transactions that they're dealing with. These are multimillion dollar deals that they are handling or are dealing with on a daily basis. We want to make sure that we're giving them the right information, the right advice, and we're getting them over the finish line with peace of mind.

Roger Barbieri (05:23):
Trust, right? It's about trust.

Jeff Evans (05:25):
Exactly.

Roger Barbieri (05:26):
You mentioned that, having that relationship. There's a gentleman that I had the pleasure of listening to once at a conference, his name's Tommy Spaulding, and Tommy's written multiple books, New York Times' bestsellers about leadership. One of the things he always talks about is the return on relationship as opposed to the return on the investment. That's something that is bred into the culture here and something that we practice daily. Awesome stuff. Jon, tell us a little bit more from your perspective about Harbor Group, where we were, where we are and where we're going.

Jon Gilbert (05:57):
Yes. Harbor Group, as Jeff said, has been around for over 30 years, and we are the longest standing lender risk advisor, period. We have just a wealth of knowledge that's just not available from anybody else. I think on top of that, being connected to Alliant as the parent organization gives us an unparalleled, unrivaled access to what is going on in the insurance market and what are borrowers experiencing. While we see thousands of deals a year and we have a very good read on the market we believe, if there's something we don't know, we have 14,000 other colleagues that we can tap into to really extract their knowledge and discrete issue or unique circumstance that arises. There's not much that we can't do to educate both the lender and at times the borrower on the insurance risk, the market availability, things like that.

Roger Barbieri (06:47):
How awesome is that to have that knowledge base? That's so cool. It's something that truly, I don't think there's another group out there like Harbor Group in that essence. The folks that we work with, and I won't say which company in particular, but one of our companies that we work with, weekly now, they are so interested, this group of lenders, so interested in learning more about the sector, the process, they want to be educated. That's empowering for us too, to see that out of the people that we work with.

Jeff Evans (07:13):
A hundred percent agree there with you, Rog.

Roger Barbieri (07:15):
Right? So what's one of the biggest mistakes, I'm going to throw this one over to you, Jeff. What's one of the biggest mistakes that you've seen some of our borrowers make? 

Jeff Evans (07:25):
I will say if I had to throw one mistake out there, it would be not fully understanding the lender's insurance requirements. I think that's a big challenge for them. Not understanding the insurance requirements, that can lead to many things as far as inadequate coverage, having the lender, having to do forced place insurance, and most importantly it can cause delays in closing. Maybe Jon could speak a little bit more to that, but I would say that's one of the biggest mistakes. What do you think, Jon?

Jon Gilbert (07:54):
Yes, I think there are mistakes to get made for sure, and we've seen a lot over the years and across thousands of deals, but the bigger piece is that there may be a different philosophy between the lender and the borrower on how to manage risk. It doesn't mean necessarily that one is right or wrong, but it's trying to balance, again, protecting the lender and keeping the borrower in a position where the insurance costs are manageable and it aligns to a certain extent with their philosophy. I think just a difference in here's what a bank or lender requires, which may be more conservative than a borrower without any debt and without bearing all the risks themselves. It really depends on the situation, but it's more of trying to share and talk through what the lender requires and why and how that fits in or not with the borrower's insurance program today, and how do we bridge that gap? It's not an adversarial relationship in our view. We have multiple constituents to try to keep happy, and our goal is to always be closing. We want to see the loan get closed, and we want to help all parties get to that point by helping solve any insurance hurdle that comes up.

Roger Barbieri (09:04):
Time is of the essence. Jeff, you said we're dealing with multi, multimillion dollar loans here. This is a lot of money, and time is of the essence. It's got to be done. You got to move quickly. Jon, I've heard you mention it quite a few times on our calls about people like, oh, can you put a rush on this? Every deal is a rush, and every deal is a rush in the sense that time is important. We should never be holding up, insurance itself should never hold up a close, ever. That's our philosophy moving through. On that note, Jon, I'm going to pitch this one over to you. I know that you've had a couple of these come through. Can you give us a quick story of a time when we've been able to jump in and actually save the deal?

Jon Gilbert (09:45):
Yes. It's a great, great question, Roger. A lot of it comes down to, again, the requirements that the bank has versus where the borrower is and how do we bridge a gap for the applicable collateral or the asset in question. One example that comes to mind is we had a mobile home park down in Florida on the southwest coast and unfortunately was in a high hazard flood zone, which a lot of Florida is. Nonetheless, what we were looking to do is find a creative approach to what was a very high requirement for flood. And one that if there was a flood loss, would likely never be reached. What that involved was working with the borrower's broker and our internal resources to really estimate what the maximum foreseeable loss related to flood could be. And then trying to marry an insurance program over that that'll provide the right protection. In this case, this loan wasn't subject to any kind of government or GSC type entities, like a Fannie or Freddie. And so didn't have as many hurdles to go through. It was a strict balance sheet loan for a particular lender, so it was a little easier. You had one party looking at making the call on what level of coverage is adequate or not. It was a quicker process, but we have seen similar situations where we're looking at the Fannie, Freddie requirements for insurance and it’s just, hard to imagine that what they're requiring would ever come into play. If you have a 10 story building and flood insurance is required up to the full replacement cost of the building, I find it hard to believe that Floor 10 is ever going to suffer a flood. If it does, then we've got a bigger problem overall I think. But in that way, we were able to work with, submit an exception and waiver and help get that across the finish line. But nonetheless, there's always a path. It's just a matter of finding out that point. There could be a point where the borrower says, look, you're just increasing my cost too much. I can't take this loan. We would hate to see that happen, but we're also not going to bend our point where we want to make sure that the collateral is protected at an appropriate level for our lender client.

Roger Barbieri (11:45):
I know that there are other stories besides just that. We could go on. It's one of those where, especially in the state of Florida, it seems like there's always something every day that's new with the regulations down there, right?

Jeff Evans (11:57):
We have borrowers come to us sometime, they'll have their broker come to us and say, hey, we just acquired a refinance from this property in Miami, Florida. It's not in flood, so don't worry about that. So, Florida's always a gamble.

Roger Barbieri (12:09):
Well guys, I'll tell you what, I think at that it's about our time to wrap it up for this episode, but this is just the first. So, we'll find our way back on here, make sure everybody's updated, and we will keep this rolling. In the meantime, come back, find us on LinkedIn, like us, subscribe, make sure that you're following us. Once again, on behalf of both Jeff, Jon and myself, thanks again for listening. Tune in. We'll be here with all of your information on commercial real estate insurance, risk, review, advisory. Be safe, be blessed and take care.

Outro (12:47):
Thank you for listening, and for more information, visit us at HarborGroupConsulting.com.