Builder shift from condos to rentals will impact insurance

Declining condominium sales in several Canadian cities mean some developers are reconsidering plans for projects that are either under way or still on the boards.

In some cases, that means switching projects from condo to rental – which can impact everything from unit size to what amenities are included onsite.

Such changes, says Peter Kennedy, managing director, and regional commercial risk and national real estate leader at Aon, will primarily be driven by shifts in the demographic profile of the intended residents.

“[When] you build a condominium, you’re targeting a certain audience, whether it’s urban professionals in the downtown core, or maybe it’s seniors, or families,” he says. “It really depends on if there’s a change between a condo plan and a rental plan…how radical that might be from what you originally were conceiving.”

Insurers need to understand the specifics because the amenities chosen, and the demographic that will occupy the building, will drive a lot of underwriting decisions around risk.

“Playgrounds and outdoor pools are the two…amenities [that] seem to have the highest risk associated with them from a liability perspective,” he says. “But gyms, regardless of whether it’s condo or rental, are still valued in any in any type of community [and by] pretty much any demographic.”

Finance follies

A dearth of condo buyers also alters construction financing calculus (developers can no longer reach the 60% sales threshold to start construction) and that, along with changing work-life preferences, may spur amenities shifts.

“[It] might give the developer the opportunity to change amenities to something they may not have thought about five, six years ago. Work from home types of amenities. Maybe building a soundproof room for phone calls, or a meeting room…for professionals that are going to work from home,” says Kennedy.

And financing changes will mean insurance coverage tweaks. Owners must obtain insurance for the building itself, regardless of how it’s financed.

But if a condo converts to rental, delayed startup coverage must be purchased in case an apartment building isn’t ready to open on the planned date and rents can’t be collected. The coverage provides funds to to effectively replace lost rents.

“You want to make sure that if there’s a loss two days before the [building’s going to] open, then you’re going to get the rents as if it opens,” he says. “That is totally different [from] condos where there’s no rental income coming.”

“If you have 100 units expected to generate $2,000 a month, and you expect to be open on July 1, and there’s a loss on June 1, that basically means the building can’t be occupied. Whether it’s water damage loss, or fire [or] poor workmanship or a design issue, you can’t collect the rents.”

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Owners will also want to boost property contents coverage.

“In new condos, basically it’s just the four walls, and the unit owner is responsible for everything within those four walls – fixtures, appliances, etc.,” Kennedy adds. “In the rental, the landlord’s responsible for the appliances and the cabinets and the carpet and the drywall…”

He says it can be hard for landlords to enforce a tenant’s insurance requirement after the first year because, while policies can be required at move-in, it’s not grounds for eviction if tenants don’t renew their insurance in subsequent years.

“The percentage of [rental] tenants that carry insurance is much lower than [condo owners],” he says. “It’s much tougher to collect from a tenant being responsible for a loss because they may not have insurance, and the lease is generally pretty limited.”

By contrast, a condo corporation can write much broader insurance requirements for each of the unit owners…“and they have a much greater opportunity to recover from the unit owners, just because the way the bylaws [and] condominium declarations have [been] drafted,” he says.

“So, the risk profile changes, but it really depends on whether the project’s target market has changed. All things being equal, an insurance company would prefer a high-end condo to a high-end rental.”