First Multi-family Burned Down in Four Months. Help!

Investor · Germantown, TN · Member since 2015 · 86 posts · 26 votes

What the chance! The worst wildfire in Gatlinburg, TN in a decade somehow found way to my apartment buildings in downtown (near town center). Luckily all tenants were evacuated by police the night before and no one was injured. However, most of them lost all their personal belongings and furniture to the fire. I provided $1,000 each to all eight families to help them push through this tough period. Hopefully they can find new places to live soon.

I'm now working with bank and insurance company to work out mortgage and insurance. Also start thinking about options to rebuild. Anybody has any experience in these matter please share your thoughts. Any thoughts are welcome. It'll be even more helpful if you can help answer these questions:

1. What to watch out for when going through the insurance claim process?

2. What are the main steps and the timeline should I expect of insurance claim?

3. I'm covered by property damage and business income. Do I need to make separate claims?

4. How should I think about rebuild?

5. Can I build condos instead of apartments on the same site? What's the pros of cons building condos vs. apts?

Here are some pictures of the leftover of my properties.

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Rental Property Investor · Friendswood, TX · Member since 2010 · 663 posts · 508 votes

@Albert D.

We have had a fire on an apartment ( but this particular one was too small versus the deductible) , a home catch fire while under contract, house burn down (part of a mobile home park ) while under contract, hurricane on apartments while under contract, hail storm roof and siding replacement on a house, and i also contracted the repairs of a commercial storefront that had a car go through it. Talking with other property owners, i have seen other insurance issues too. It seems generally speaking, the property owner can come out better ahead of the catastrophe than before. r

Not an expert but here is what I would suggest . Don't sign any contracts! Im assuming there will shortly be a slew of contractors coming through promising this that etc trying to get all these insurance jobs, don't do that on a whim. Document everything! Pictures , videos, everything. Find out if you need to do something to prevent further damage , I'm assuming its trashed but say if its salvageable like tapping the roof if there is a hole ( so no rain gets in ). If these were hosed down by a fire department thats going to have its own damage. Get specific info for needing to file your business income insurance so you can keep the mortgage paid but the provisions on this will vary and what they need etc. Talk to your insurance company as you are doing and they will advise. I think they will connect you with an adjuster to estimate the damages. You may need to supplement this with your own stuff to figure out cost of repair. If it goes to rebuild, there will be other issues potentially. I have heard where its a total loss and people just used the proceeds to pay the mortgage but then still were able to salvage a portion of the property.

You are going to want to get with your zoning department regarding rebuilding and what your options are. Sometimes uses are grandfather but they stipulate if 50% more of a structure is burned you have to rebuild to todays standard. Insurance companies commonly have a provision for this. Go through your policy as well . If its repair, the insurance company may need to structure your payments to you but since you have a lien holder, you may have to work with them on a withdrawal basis( so they know the $$ goes towards their asset repair) .

Some insurance stuff may be state specific but sounds like you are already on the right track. If there was a lot of housing damaged in the area, there will be a shortage of housing and the quicker the turn, the quicker you can offer replacement housing for those that need it.

Your lease should stipulate that tenants should carry rental insurance . This can go in depth a lot more but thats a quick crash course on some things to do. Good luck.

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Lisa Misuraca
Tucson, AZ · Member since 2014 · 134 posts · 43 votes
9y
I'm so so sorry for you loss and also for your tenants loss. I have no experience in this.I was just watching videos of the fire on CNN.
3 Reply
Kishore P.
Realtor · Farmington, MI · Member since 2016 · 126 posts · 69 votes
9y
@Albert D.
It's tragic to learn about your investment property being destroyed by the fire.
It is also heartening to know no lives were lost or injured.
I recall listening to a podcast @Brian Turner mention that his Investment property being damaged in a fire. He would be a good resource to guide you through this tough situation you are in now.
So, I urge you to send him an email as well.
Good Luck
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Account Closed
Rental Property Investor · Friendswood, TX · Member since 2010 · 663 posts · 508 votes
9y
@Albert D.
We have had a fire on an apartment ( but this particular one was too small versus the deductible) , a home catch fire while under contract, house burn down (part of a mobile home park ) while under contract, hurricane on apartments while under contract, hail storm roof and siding replacement on a house, and i also contracted the repairs of a commercial storefront that had a car go through it. Talking with other property owners, i have seen other insurance issues too. It seems generally speaking, the property owner can come out better ahead of the catastrophe than before. r

Not an expert but here is what I would suggest . Don't sign any contracts! Im assuming there will shortly be a slew of contractors coming through promising this that etc trying to get all these insurance jobs, don't do that on a whim. Document everything! Pictures , videos, everything. Find out if you need to do something to prevent further damage , I'm assuming its trashed but say if its salvageable like tapping the roof if there is a hole ( so no rain gets in ). If these were hosed down by a fire department thats going to have its own damage. Get specific info for needing to file your business income insurance so you can keep the mortgage paid but the provisions on this will vary and what they need etc. Talk to your insurance company as you are doing and they will advise. I think they will connect you with an adjuster to estimate the damages. You may need to supplement this with your own stuff to figure out cost of repair. If it goes to rebuild, there will be other issues potentially. I have heard where its a total loss and people just used the proceeds to pay the mortgage but then still were able to salvage a portion of the property.

You are going to want to get with your zoning department regarding rebuilding and what your options are. Sometimes uses are grandfather but they stipulate if 50% more of a structure is burned you have to rebuild to todays standard. Insurance companies commonly have a provision for this. Go through your policy as well . If its repair, the insurance company may need to structure your payments to you but since you have a lien holder, you may have to work with them on a withdrawal basis( so they know the $$ goes towards their asset repair) .

Some insurance stuff may be state specific but sounds like you are already on the right track. If there was a lot of housing damaged in the area, there will be a shortage of housing and the quicker the turn, the quicker you can offer replacement housing for those that need it.

Your lease should stipulate that tenants should carry rental insurance . This can go in depth a lot more but thats a quick crash course on some things to do. Good luck.
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Rental Property Investor · Friendswood, TX · Member since 2010 · 663 posts · 508 votes
9y
One other note i didn't mention, insurance jobs can be lucrative for contractors, if you can do your own contracting ( if you have the experience and comfort level ) typically they take what the trades charge to complete work ( i.e. electrical, paint, flooring ) etc and then throw 20 % on top of those numbers ( if its 3 or 4 trades that need involvement) 10 % for overhead and 10% for profit. I would make sure you can get the blessing of insurance company if you have some type of company that you can do this with. (not a recommendation just thinking out loud here) . Also , typically , you get a good chunk of the repair up front and then you need to furnish documentation of the completed repair to get the balance ( depreciation ) and you would need to show that full amount spent. Sometimes contractors will also incentivize you with spiffs, like they will also do your parking lot as an example ( no damage) and that would not be kosher with the insurance company as it may be insurance fraud so you really want to work with honest and ethical people whatever aspect you choose to go.
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Albert D.
OP
Investor · Germantown, TN · Member since 2015 · 86 posts · 26 votes
9y
Thank you Lisa Misuraca and Kishore Pathanjeli !
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Albert D.
OP
Investor · Germantown, TN · Member since 2015 · 86 posts · 26 votes
9y
Jack Baczek , Really appreciate the thorough suggestions. Very very helpful indeed. Yes, I documented with a lot of photos, which were taken by my local GC who went there couple of days after the fire when the city finally granted limited access to our property. I updated both my lender/bank and insurance company. Bank asked me to handle and is working on extension of my mortgage. Insurance inspector is onsite right now with my local GC to go through the property. The situation is devastating. Inspector said there are four other inspections he'll do before mine only today. He saw half street burned down in some areas. My trusted local GC assessed the property to be totaled but we'll see how the inspector view it. If totaled, guess we'll go the rebuild route. We'll check on current code and zone requirements as you suggested. I'm pretty sure at least 50% needs rebuilding. Can I build more units or convert to condos when rebuilding? Will insurance have issues with the change? I need to check with insurance on the business income claim see what they need and how the process goes. Thanks for pointing out that. When I made claim, they didn't even ask me this. I'll keep you posted on the inspection. Thanks again for the valuable advice.
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Anthony Lee
Insurance Agent · West Long Branch · Member since 2015 · 206 posts · 64 votes
9y
@Albert D. I'm sorry to hear of your loss. The purpose of insurance is to indemnify (make you whole) after a loss. Insurance claims procedure varies from company to company. It would be best to speak with your adjuster or agent regarding what you can and cannot do when rebuilding the property.
It is important to have an open dialogue with your adjuster and your agent. They should be there to walk you through the process.
It was very kind of you to provide the tenants with $1,000 Each. to help them through the process. Did you know some insurance companies will actually provide coverage for tenant displacement in this sort of situation?
Do you know if the tenants had Renters Insurance? If so, this will help them in the replacement of their personal property and should provide coverage for their loss of use until your property is rebuilt.
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Account Closed
Rental Property Investor · Friendswood, TX · Member since 2010 · 663 posts · 508 votes
9y
@Albert D. I didn't realize you weren't local, I would just make sure that you have a lot of trust in your GC and level of competency. Ultimately how well the claim is paid out will hurt or help you. If its a total loss , I would def try and be involved as much as possible so you are not short changed when its done. Don't expect things to happen overnight if there is a massive loss in an area as it can take some time to get the right parties out there etc.
I gave the 50% as an example, you need to read your ordinance codes . For example, when the property was built you may have had certain MF density requirements and they could have changed over time. You need to get with your zoning and planning department on this. Just like when you remodel a house , you might have to bring certain things up to code.

For anyone reading this, its events like this where you need to remember to have some reserves set aside because this is a very unlikely event and he has lost 100% of the revenue but still has a mortgage payment.
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Jeff B.
Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
9y
I lost two units (upper+lower) by tenant smoking. I had guaranteed replacement value and loss of income coverage.
Get the property release by the fire marshal so you can begin the restoration process.
Inform you insurance agent of the loss (give the date) as well as the Loss Payee on your mortgage - - and these guys can delay you like crazy so manage their process. Due to my loss payee, 5 extra months were consumed, expired on the lost rents, AND delayed occupancy + that income ( 5 x 2units x rent = lost income).
An inspector will come to review and cite you an estimate to rebuild. The loss rents should come quickly (at least then did from Farmers) and stop one year from the date of the incident (again, farmers).
Get your contractor(s) to bid on the restoration AND get them moving too.
BE SURE you follow contracting guidelines for your state; in Calif, the EMD can not exceed 10%of the contract. Then arrange for Progress Payments in thirds (the 10% doesn't count). This will get the work done and no one will abandon the project.
HOPE THIS IS OBVIOUS:
- check with the state for a valid contractors license and existing BOND.
- ask to see the bond
- If you use a GC, make sure the subs are licensed too (have the GC get personal & business name + license number and get that emailed to you.) You have the right to review and confirm all subs.
- you need to manage the payments to the subcontractors!!! They can file a lien for non-payment if the GC plays games.
- Make the final 1/3 payment ONLY when you get the permit FINAL signoff
BTW: Every lease should have a clause for destruction of the premises is automatic termination of the lease. If Tenant was the cause of the loss, then the deposit is forfeited and otherwise, it's a no-fault mutually agreed termination the the deposit is totally refunded.
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Daniel Rosenberger
York, PA · Member since 2016 · 21 posts · 4 votes
9y
I am so glad none of your tenants were hurt. Good luck with this. I will be following.
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Albert D.
OP
Investor · Germantown, TN · Member since 2015 · 86 posts · 26 votes
9y
Anthony Lee , Jack Baczek , Jeff B. , Great great advice. Thank you all so much. Here is the update and more questions from me. I'm with Celina in OH. They responded pretty quickly. I made claim on Wed and they already finished inspection today. Knowing a lot of claims going on and limiting road access to this area, I'm impressed. Both Adjustors deemed both buildings a total loss and said they would send me checks to max limit. However, the limits are not what I remembered. I increased the limit about two weeks ago due to bank requests while doing refinancing. Adjustor agreed to double check on the limit and get back to me next Tue. Hopefully all gets aligned by then. Not sure why they don't have the latest limit at hand. Anthony Lee , any guess / possibilities from your experience? On the Business Income coverage, Adjustor asked me to provide leases and offered on the phone to cover six months loss of income. I checked the policy, it reads like 12 months max payment plus two extended months payment pending on actual rebuilding period and time to restore business after rebuilding. Should I push back on the six months? Not sure on what basis he made the comments but it was a quick conversation. I think I need to clarify that with him next week. He sounds exhausted with at least five inspections in a day (mine was No. 5 in early afternoon). But love to hear your thoughts on this.
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Anthony Lee
Insurance Agent · West Long Branch · Member since 2015 · 206 posts · 64 votes
9y
@Albert D. You should have documentation regarding and and all policy information and changes that may have been made to the policy mid-term. If you increased your limits due to bank requirements, and the new limits and coverages were made effective, you should have a new certificate of insurance and or declarations page which states it as such. I believe Celina has an online portal which, where you should be able to create an account, if you don't already have one, and access it there. That being said, your agent, and his or her office, will have it on file and should be able to provide it. If you're agent doesn't have it or cannot provide it, well thats a while other concern. But then it begs the question as to whether the changes were actually made and such.
The Business Income Coverage, and how it is handled, will vary company to company. That being said, generally coverage is only provided until policy limit is reached, or the rebuilding of the property is complete, whichever is sooner.
I do recommend that you contact your agent, or his/her office, as they should be guiding you through this.
Feel free to reach out, my information is below. If you have any other questions, i'm more than happy to help where I can.
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Jeff B.
Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
9y
The offer for 6 months is typical - - just make sure it's NOT final.
I provided my PnL to prove rents, but with only 4 months you may be forced to provide lease copies. Can you create a PnL via software accounting??
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Account Closed
Rental Property Investor · Friendswood, TX · Member since 2010 · 663 posts · 508 votes
9y
@Albert D. For sure get clarification on the policy limits especially if they were changed. I know when we submitted our business insurance claim we had to provide leases as well but don't remember it being a clear cut process. Honestly if they are paying out the claims to the max and offering to pay 6 months of insurance , I think thats reasonable . I guess that would be dictated by what your policy states but then also in a rebuild situation, it may take longer than 6 months so maybe just do some digging . What they say is not gospel and can be modified ( just be sure paying out max value doesn't contradict this) . I guess the question is if you rebuild you might want to go for the 14 months if you need it.
Also, is there a provision in there for scraping existing structures or is that factored into the replacement value ?
Are you going to rebuild ? What are the numbers going to look like when your done. I assume the proceeds will first pay off your lender and then balance to you. Are you essentially going to end up with the land ( or land plus cash) with no lien against it? Also out of curiosity, what was your replacement value insurance relative to what you paid for the deal. You don't have to share exact numbers , just interested to know if this is ending up in your favor ( numbers wise)
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Amy A.
Portland, ME · Member since 2012 · 616 posts · 550 votes
9y
Insurance companies want to pay you as little as possible. That's a big building and must have been expensive. I would hire a lawyer to make sure you get all that you are entitled to before signing anything from the insurance co.
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Albert D.
OP
Investor · Germantown, TN · Member since 2015 · 86 posts · 26 votes
9y
Anthony Lee , I asked my agent to remind the Adjustors on the change, which was effective weeks ago. I also have the updated COI with me so I think we are good on the increased limits. Probably just a matter of their internal alignment and update. Thanks for the advice and offer to help. I'll reach out to you on the business income payment. Albert
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Albert D.
OP
Investor · Germantown, TN · Member since 2015 · 86 posts · 26 votes
9y
Jeff B. , You are right on. They did ask for the leases. I can provide those no problem. Yes, I can put together the P&L together quickly as well. That's part of my paid w2 job. :)
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Albert D.
OP
Investor · Germantown, TN · Member since 2015 · 86 posts · 26 votes
9y
Jeff B. , How do I make sure it is not final? Should I leave it open to pending actual time needed for rebuilding and restoring of business? What if we do fantastic job and restore businesses in five months? Does it mean I'm worse off with one less month of payment? Any suggestions? Thanks, Albert
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Jeff B.
Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
9y
Originally posted by @Albert D.:

Jeff B. ,
How do I make sure it is not final? Should I leave it open to pending actual time needed for rebuilding and restoring of business? What if we do fantastic job and restore businesses in five months? Does it mean I'm worse off with one less month of payment? Any suggestions?
Thanks,
Albert
I ASKED if the payment was final and was informed, no. I overran the coverage period due to delays, but I would expect to get coverage from Start until the units were AVAILABLE for showing. Once you start showing, it's no longer covered.
Take what they give you -- it's ALL TAX FREE anyway :=)
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Albert D.
OP
Investor · Germantown, TN · Member since 2015 · 86 posts · 26 votes
9y
Jack Baczek , A lot of great questions. I don't have answers to all of them. Some of them have occurred to me yet. But I do have to figure these out going forward. This is entirely new subject to me. Feel like trying to make quick decisions while the train goes 100 miles an hour. I wanted to share my current thoughts here and welcome any comments and suggestions. Questions to think through: "Also, is there a provision in there for scraping existing structures or is that factored into the replacement value ? Are you going to rebuild ? What are the numbers going to look like when your done. I assume the proceeds will first pay off your lender and then balance to you. Are you essentially going to end up with the land ( or land plus cash) with no lien against it? Also out of curiosity, what was your replacement value insurance relative to what you paid for the deal." My initial thoughts: I need to ask but my GC said, the Adjustors mentioned of scraping the existing structure. GC doesn't agree. He will check with city and engineer as needed see if we can keep the structure as it'll save us tons of money and time. Considering there are 1,000 of construction going on at the same time around this area, this is definitely a preferred way to go if possible. Not sure how to work this out with insurance but we'll definitely look into options we have. Definitely rebuild. Numbers TBD. I am thinking to max out numbers of units to rebuild to max value. Of course we need to check feasibility of plan with architect, engineer, city and our budget. A lot of moving parts right now. I assume we pay off lender and have clear title on land after receipt of insurance checks. I'll have cash and land and bank already offering up construction loan for rebuilding. I've been a loyal customer to my bank and been very transparent in the process. I believe they want to more business with me. They also agreed to extend mortgage on apt while waiting on insurance payment.
1 Reply
Michael H.
Investor · Kansas City, MO · Member since 2016 · 130 posts · 64 votes
9y
I'm a former fire adjuster but not in Tennessee. Some states are stated value states to prevent insurance companies from inflating their rates. Meaning if the insurance company deemed the value of the property to be "X" then a they owe "X" when a total loss occurs. I've paid almost a million $ on a property valued at $200,000. Check to see if Tennessee is a stated value state. They also need to deem the structure unrepairable in order for this to apply. Just because there is a lot of smoke doesn't mean it's a total loss. If the roof is gone and walls are charred that maybe a case for total loss. If not deemed a total loss and you need to rebuild just pick the contractor you like and trust the best. There's absolutely no reason not to trust the insurance companies recommendation for a contractor unless you don't like them. They will often work on your side and make it easier to get things done and well. They've been heavily vetted and believe me they want their money too, and they deserve it. If Public Adjusters are legal in your state I would recommend not getting one. They just take your money and the insurance company will likely pay you the same. If the insurance company had to pay you $300k because it's a stated value the PA would get a % for doing nothing. You should also be able to get lost rents until you settle or rebuild within an expected time frame. If your tenants had renters insurance they should be taken care of too. I'm sorry for your loss and your tenants loss. It's never fun to walk up to a scene like that. Best wishes!
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Michael H.
Investor · Kansas City, MO · Member since 2016 · 130 posts · 64 votes
9y
I forgot to add a couple things. If the property needs torn down there's an additional 5 or 10% for that once it's been incurred. Landlord policies can be tough too. Sometimes they're ACV only. I really hope that's not the case. There's possibly additional endorsements as well. Your adjuster will work well with you to inform.
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Rick H.
Lender · Greater LA/Orange County area, CA · Member since 2012 · 3k+ posts · 3k+ votes
9y
Any problem that can be fixed with a checkbook is really not a "problem."
I hope I presume correctly that no loss of life or injuries?
I would consider hiring an independent insurance adjuster to mitigate the claim. Frankly (and fortunately) I have no direct experience in such matters. If it were me, I'd consult with an exoerienced trial attorney who knows and understands claims adjusters in your part of TN.
Now the down side is that most all the good adjusters will be overloaded with business. Is it possible to bring in another adjuster from outside the area? Are they state licensed? I really don't know.
I do know that cool heads prevail. Also, you ought to delegate as much of this situation and the remedies to experts so that you can focus on helping your tenants and their families during the next few months endure the hardship of winter and Holidays in temporary accommodation.
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Jeff B.
Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
9y
Originally posted by @Albert D.:

Jack Baczek ,

I need to ask but my GC said, the Adjustors mentioned of scraping the existing structure. GC doesn't agree.
This is much like totaling a car. If the insurance adjustor evaluates as a total lost, the question is your coverage: Did you get Guaranteed Replacement Value? The normal policy would be Depreciated Value less Deductible and that's a loose-loose.
Regardless of the evaluation, if the GC will rebuild from the current condition, then the funds received can be applied however you please, but if there's a shortage, you will have to make it up. Be sure you get a Completion Bond from the GC.
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Derek Lacy
Insurance Agent · Maitland, FL · Member since 2015 · 397 posts · 244 votes
9y
TN is stated value if the policy is over 90 days old. So you'll receive that too number on your policy if determined a total loss and you had the policy over 90 days. Under 90 days they can backdate a change on the policy to lower the top line to their inspected value.
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