Despite Florida’s reputation for eternal sunshine, its vulnerability to intense and frequent weather disasters has made it one of the most volatile climates for insurance.

Lenders, who are sensitive to risk, have a lot of power in how much a developer will have to pay for insurance on their projects. But amid an active year for construction lending in South Florida, more developers are honing in on a mortgage’s insurance requirements before agreeing to work with a lender, panelists said at Bisnow’s Palm Beach State of the Market event.

Bisnow/Chloe Gallivan

TCG Real Estate’s Stuart Swann, Tortoise Properties’ Jake Geleerd, Affiliated Development’s Nick Rojo, Brown & Brown’s Christian Zanartu, Kolter Multifamily’s Jeff Quinlivan, 13th Floor Investments’ David Resnick and Gunster’s Brian Seymour

“One of the first things we asked our lenders is, ‘What’s your stance on insurance?'” Affiliated Development President and co-founder Nick Rojo said onstage at the Hilton West Palm Beach. “It’s meaningful now. It used to be an afterthought, and now it’s something where I would literally not choose a lender if they’re making me get coverage of the [total insurable value] on wind.”

It is a lesson some developers have learned the hard way.

Two years ago, Neology Group had to walk away from a lender after signing a term sheet and months of negotiations, Chief Financial Officer Rick Porras said in an interview.

The lender wanted to ensure Neology would carry the total insurable value of the property, which is the maximum amount an insurer would pay out in the event of a total loss on the property — a worst-case scenario.

Flood coverage alone was $20M, Porras said, and the company quickly realized that it couldn’t work with lenders requiring coverage for total insurable value for projects in Miami.

“That’s when we shifted focus to, ‘Hey, now we’ve got to vet these lenders, and before we even sign and go into loan docs, we need to get the loan program [and] the insurance program approved,'” Porras said.

Developers began noticing the impact it had on their budgets when the insurance market became volatile in 2021 — which worsened when Hurricane Ian, a Category 4 storm, hit Florida and South Carolina in 2022.

The average cost to insure an apartment rose more than 130% in 2023 compared to the 15-year prepandemic average, according to Moody’s. Between 2017 and 2023, commercial property insurance rates rose by about 10% each year.

In the last year, rates have provided some ease. Insurance rates in the third quarter declined by 1% in the U.S., following a flat quarter, and 9% since the third quarter last year, according to a third-quarter report by Marsh.

While some lenders have softened on their policies in light of a cooling insurance market, developers have hardened for good.

Bisnow/Chloe Gallivan

JRM’s Anthony Iandoli, Related Ross’ Webber Hudson, Pebb Capital’s Todd Rosenberg, Newmark’s Mitch Heifetz and Pebb Enterprises’ Ian Weiner.

“We tell the lender, ‘This is the program we have in place. This is the coverage that we have, the limits, the deductibles. You need to be comfortable with that before we even proceed with signing a term sheet,'” Porras said. “We clear the insurance hurdle before even signing a term sheet.”

Lenders were requiring total insurable value on flood damage, wind and hail, Porras said. Rojo found lenders are the harshest on wind insurance, especially when it comes to builder’s risk, Rojo told Bisnow in a phone call.

Developers have been pushing for policies based more on replacement costs, which they said reflects more realistic exposure for new buildings. But considering Miami building codes require concrete structures and hurricane-proof windows, both Rojo and Porras said it was unnecessary.

“I’m really wasting money when I’m insuring those things,” Rojo said.

Christian Zanartu, senior vice president at insurance brokerage Brown & Brown, said a client was purchasing a $100M asset, and the decision on which lender to go with came down to their insurance requirements.

While he didn’t detail what the requirements were, he said the winning lender offered a more flexible insurance policy that wound up saving the borrower between $600 and $700 per unit.

“I get it. At the end of the day you have these lenders, they’re deploying a ton of capital, and they want to protect their investment,” he said. “But there’s often times where we have to be able to push back on lenders based on market conditions, what’s happening and talk reasonable limits.”

Bisnow/Chloe Gallivan

Bilzin Sumberg’s Joe Hernandez, Bristol & Berkeley Palm Beach’s Al Adelson, Kastelo Development’s Jerad Graham, Related Ross’ Daniah Missmar, Catalfumo Cos.’ Joey Eichner, GVC Real Estate Team’s TJ Verdiglione, Alba Palm Beach’s Kenny Baboun and Forest Development’s Peter Baytarian.

Porras said he had a previous lender that required coverage for $10M of total insurable value, but the true replacement cost for the property was far less than that.

“We said, ‘Hey, come look at our property. The ground floor is completely garage. There’s no units on the ground floor, maybe equipment that’s worth about $50K. So, your requirement of excess flood coverage doesn’t make sense,'” he said.

While lenders won’t allow coverage for less than the balance of their loan, they have become more open to replacement-cost-based policies, Porras said.

But it’s a little bit easier for developers to find some leverage these days with the rise of private credit in the marketplace.

All lenders want to feel comfortable with their investments, but private lenders have more leeway than banks in terms of mortgages they can offer, TCG Real Estate Managing Director Stuart Swann said at the Bisnow event.

“If we need to give on insurance to get a deal done, we’re more flexible to do that than, obviously, agencies, maybe [life insurance companies] and certain banks,” Swann said.

Banks have had a slow few years as they attempt to mitigate losses, and while they are getting their lending back to prepandemic levels, private lenders have made for some steep competition.

Now, the majority of lenders are more accommodating of developers and their insurance requirements on a deal. 

“I think they had to do it to stay competitive if the private lenders are doing it,” Porras said. “And then all you need is a small handful of major lenders doing it.”