Hi, first a request: Do you know of a reasonably priced earthquake insurance provider (that covers Washington state)?

Second, a cautionary tale: I have owned a 29 unit apartment complex for 9 years, always paying the mortgage faithfully and at a high interest rate (what were current rates at the time) that the lender should be quite happy with nowadays.  Over those 9 years, the note was sold once and then sold a second time.  The new note holder, a large firm out of Dallas, recently and totally unexpectedly gave one month notice that they require my property to have earthquake insurance.  I have asked multiple highly experienced investors, brokers, lenders, and even 6 seismology experts in the area if they had ever heard of a lender requiring earthquake insurance for the entire area north of Seattle.  Literally none had ever heard of this situation.  The seismology experts had never heard of the note holder's classification system.  Everyone has been flabbergasted.  The additional insurance cost is more than the positive cash flow of the property, but this new note holder doesn't care.  When asked multiple times what is the basis of their policy, why they are forcing implementation of something no other reputable lender requires for the area, and other related questions, they repeatedly decline to answer except to circularly say it is their new policy.  Although the loan documents definitely do not require earthquake insurance, the note holder is using a vague "weasel clause" that says "Borrower shall keep the improvements now existing or hereafter erected on the Property insured by carriers at all times satisfactory to Lender against loss by fire, hazards included within the term "extended coverage", rent loss and such other hazards, casualties, liabilities and contingencies as Lender shall require and in such amounts and for such periods as Lender shall require."

So, the cautionary tale here is that those vague weasel clauses that are prevalent throughout lender-favored loan documents can come back to bite you in a big way, especially when in the hands of a note holder blazing a new path that nobody else agrees with but they have the weasel-clause-endorsed right to do so.

I will need to look hard into refinancing. Although the property cash flows, the market price has unfortunately declined for local tertiary market reasons and it will require a large out of pocket amount to get back to a LTV ratio for regular financing again (currently at about 86% LTV). The out of pocket down payment expense is the bigger concern about getting away from under this rogue note holder.

Any ideas on this unprecedented situation would be appreciated as well.

Thank you.

Thanks for the outline

Where is property located and  what insurance  firms / companies  have you tried  for the EQ insurance you need ?

Dave SKow

Sorry to hear that story, Scott.  That is indeed broad language that the Insurer is using to demand the earthquake insurance.  Please keep us updated. 

This is a 26 unit right? The property is valued on your NOI and it will take a hit with the added insurance cost. I would refi out asap

Hello Scott,

I am sorry to hear about you rogue note holder!

As far as for earthquake coverage it is really going to depend a few factors. The primary factors being; building size, building age, location and your choice of coverage/deductible. It does cover in the event of a volcanic eruption as well as an earthquake.

Please private message me for further information or questions.

Have a great day!

Ryan Schopp

Refi, Refi , Refi. 

Make sure you put your no earthquake insurance clause in the note.

Tapan Trivedi

Interesting. I analysis a lot of financials on Seattle area multi and haven't seen this either. Sorry I don't have a recommendation for you though.

Having been both a mortgage banker for 18 years as well as an insurance agent for 3.5 years, I can tell you, the lender has the right to require you to have coverages that secure their collateral. Typically this is seen on the flood insurance front, and typically its the initial lender that makes all the requests. In this case, because the existing lender has these clauses (which are standard in most all loans) they are taking a harder stance than other lenders. They basically dont want to take a chance with their collateral, and the clause allows them to do that.

That said, I would definatley look at refinancing. There are many good lenders that will do a full 20-30 Amortization on apartments (Find a good broker that does commercial). If you are required to have the earthquake insurance, I would give Ryan Schopp (shown above) a call. I have personally worked with him over the last 2 1/2 years, he's got excellent knowledge, and excellent products.

Just my 2 cents.

Hi Dave, the property is in Oak Harbor on north Whidbey Island.  I have only contacted my personal insurance agent so far regarding insurance options.

Thanks,

Scott

Thanks for the support and inputs, Andrew, Brie, Ryan, Tapan, Zach, and Kevin.

Ryan, I'll reach out to you off-thread.

Kevin, yes agreed that due to the open-ended and deliberately vague nature of the original lender's CYA clause it is "permissible".  Nonetheless, having the game suddenly changed significantly 9 years into a loan is quite aggravating.  The fact they don't care that they are obliterating cash flow and reserves also is self-destructive on their part.  And the total lack of any agreement on this policy from other lenders and seismology experts just makes their approach that much worse still.

My guess is that the new Note Holder bought at a discount and is looking to force you to Refi so they can recapture their discount.  

Here are a few options:

1)  Get the insurance.

2)  You could consult a lawyer.  I would think that if you have had this not for 9 years and the issue has not been raised then you could make an argument that it is not required and by not enforcing it the prior lender waived the right to require it.

3)  Offer to buy out their note at a discount, remember they probably bought it at less then face value, then refi the lower amount and hope you get a lower rate AND don't have to put cash into the deal.

Thank you for sharing those good ideas and theory, Bob.

I have actually contacted two different real estate attorneys that I have worked with in the past.  One said that they were within their contractual rights even if there was effectively no precedent and it didn't make sense otherwise.  The other took a different approach and said to hire an attorney in the local county to get a temporary restraining order in place against the insurance requirement; then the lender would have to prove the basis of their highly unusual requirement.  The latter attorney also said to contact the president directly.  I have contacted the president's assistant today, who has been helpful so far and she is looking into it.  More to come on that.

Interesting idea to offer to buy their note at a discount (above what they paid for it).  It is another possible resolution option to keep in mind.

Did your insurance agent offer a Difference in Conditions policy? He probably should have whether your lender required eq coverage or not. While coverage can vary policy to policy it's something you can look at as earthquake can typically be covered On a difference in conditions  policy. There are also other options that will be reasonably priced as long as your not sitting on a fault line. 

Hi Derek, yes he did offer DIC policies but they are actually even more expensive since they are even broader and also cover landslide, mudflow, flooding, etc.

Originally posted by @Bob E.:

My guess is that the new Note Holder bought at a discount and is looking to force you to Refi so they can recapture their discount.  

Here are a few options:

3)  Offer to buy out their note at a discount, remember they probably bought it at less then face value, then refi the lower amount and hope you get a lower rate AND don't have to put cash into the deal.

 I had a lender OFFER US a discount if we would refi.  We are also in a tertiary market (Shelton).  They required extended flood to force us out (an extra $3500/yr on a 42 unit bldg).  It took me over a year to find a lender who would take it.  We finally settled on a smaller local bank that knew our market well. In the end we received about 5% discount on our payoff ($70k!)  Not bad for all the hassles we endured.

Interesting scenario, Curtis.  That could be a win win if the discount is significant enough.  I'll plan to check on it to determine if that would help them as well.

Hello @Scott Price   and @Kevin R. 

 Regardless of whether you are forced to buy insurance or not, would you consider having the earthquake insurance if the cost is reasonable?  I didn't have to worry about this in AZ but in WA, I understand there is a risk of Earthquake due to past history and how the West Coast is sitting on the Fault line.  I have been paying one on my primary residence, $40/mo (and considering purchasing one for other properties in WA) but reaching out to folks in the state of WA your thoughts on this (I understand this is no brainer in CA).

It is not a no brainer in CA! The problem with EQ insurance is not the premium, but the deductible. You have to have equivalent coverage as your homeowners insurance and then the minimum deductible is 15%. So basically on a 850K policy (not unusual for BA home) you pay about $3.5K per year in premiums but have a almost $130K deductible. That level of deductible would allow you to put in a whole new foundation before insurance kicked in a dime. So actually most people here in the BA do not carry EQ insurance even though most of it sits on active faults. Interestingly lenders don't seem to insist either.

Thanks @Anish Tolia  

That's scary...