The Tenant Damage Waiver:
Protecting The Property Owner’s Bottom Line
The ongoing search for return in today’s modest growth environment has spurred investors to seek out opportunities in multi-family or student housing. While these categories of investments have typically performed well, they have come with some unique risks. Chief among these has been the risk of property loss due to tenant-caused damages.
While this kind of exposure has typically been handled through the HO-4 policy, this strategy is not without its own problems. For openers, the liability provisions of the typical policy may not adequately cover the damages that can accrue during a loss event. Secondarily, there is no guarantee that the renter will continue to remain insured, since they are able to cancel coverage at any time without notifying management.
These kinds of vulnerabilities are among some of the reasons why more asset owners in the multi-family and student housing categories are turning to the Tenant Damage Waiver – or, TDW. This tried-and-true strategy has proven effective, not merely in providing an alternative for coverage, but as a revenue generating mechanism that protects the investor’s bottom line.
From Protection To Participation
The Tenant Damage Waiver is straightforward in concept. In lieu of satisfying an insurance policy requirement, the renter pays a monthly fee to the property owner. This releases them from the legal obligation to provide property coverage as listed in the lease agreement. It also avoids the inconvenience of every renter having a different cost basis and having the insurer underwrite and rate individuals based on variable costs.
Instead, a corporate-based master policy is issued to the property owner in the amount, typically, of $100,000 each occurrence. Within this per occurrence limit, a sublimit may be extended to residents to provide up to $15,000 for personal property damage or loss.
An important distinction: This is not a renter’s insurance policy issued to the tenant, but an alternative that allows the tenant to meet the property damage requirement within the lease. Thus, there is no underwriting or application and anyone is eligible. In addition, the program can be offered as an option to new and renewing tenants or as a condition of the lease agreement.
A program fee is added to the rent which is collected by the property manager and remitted monthly to the program administrator. From the program fee, the administrator retains a modest portion for their services and remits the remaining funds to the captive as premium. This feature provides owners and property management firms the opportunity to generate additional revenue streams, boosting net operating income.
The Program Administrator’s Role
The Tenant Damage Waiver is a turnkey program with one beneficial effect being that the program has been proven to limit losses on property and casualty policies and can be used as a deductible buy-down strategy.
In brief, the program administrator agrees to provide training and support to property managers, including the proprietary software used to enroll and track renters in the program. All renters are tracked in the system, including both those who have an HO-4 policy and those without coverage. The administrator manages every aspect of the process, including delivery, monitoring and reporting.
All claims that occur within the program are handled by the administrator. The program is comprehensive in covering the five major categories of loss in tenant-caused damages, including fire, smoke, explosion, water discharge and sewer back-up.
Captive Strategies
Properly applied, a Tenant Damage Waiver initiative has several interesting benefits for captives. As mentioned, the program can be the source of substantial ancillary income to property owners through a captive insurance agency.
Importantly, the revenue generated does not flow through the operating entity. Rather, it is collected by property owners and administered through the third-party administrator, who remits net funds to the captive as premium.
Because these profits are distributed as a qualified dividend, they are taxed at the long-term capital gains rate. And so, the strategy produces twin benefits: increased risk protection and a vehicle for building wealth over time.
Especially in today’s real estate market environment, investors should consider multi-family and student housing income-producing properties in their investment strategies. However, they would be wise to consider the Tenant Damage Waiver option as a viable strategy for risk participation and building a more robust bottom line.
