Last year, a fire broke out in a Section 42 apartment complex. Of the 500 units on the property, 250 units were severely fire and smoke damaged. To facilitate repairs, the residents of those units were forced to move into temporary housing for a period of five months.
In addition to losing rental income of roughly $1,875,000 (250 families x $1,500 per month x 5 months), the building developer also incurred other anticipated expenses in fulfilling their HUD responsibilities.
The Building Developer’s Responsibility
According to the HUD Code of Federal Regulations 290.17, tenants who are required to move temporarily must be provided:
- Reimbursement for all reasonable out-of-pocket expenses incurred in connection with the temporary relocation, including the cost of moving to and from the temporary housing and any increase in monthly rent or utility costs. The party responsible for this requirement may, at its option, perform the services involved in temporarily relocating the tenants or pay for such services directly.
- Appropriate advisory services, including reasonable advance written notice of the date and approximate duration of the temporary relocation; the suitable (and where appropriate, accessible), decent, safe, and sanitary housing to be made available for the temporary period; the terms and conditions under which the tenant may lease and occupy a suitable, decent, safe, and sanitary dwelling in the building/complex following completion of the repairs; and the right to financial assistance provided under paragraph (e)(1) of this section.
Furthermore, if the tenants have to relocate for more than one year (which thankfully did not occur in this case), the developer may not be able to claim the tax credit deduction through the IRS.
The Dollars and Cents – $730,000
In this scenario, many residents were unable to find comparable housing on short notice in a tight rental market. They were forced to pay an average of $360 per month more than they had been paying. In addition, they incurred the cost of moving their salvageable belongings to and from their temporary housing, at an average cost of $1,120 per family. Let’s look at how these costs add up:
- Additional cost of housing: 250 families x average increase of $360 per month x 5 months = $450,000
- Moving expenses: 250 families x average cost of $1,120 = $280,000
- Total unanticipated cost: $730,000
Very Real Insurance Implications
At first, the building developer wasn’t concerned. They assumed that property, liability or fire insurance would cover these added costs. The developer soon learned that the property’s insurance policies did not include a provision for these added expenses. In fact, building developers for tax credit properties should have specific insurance packages that address the unique requirements of HUD, Fannie Mae and Freddie Mac.
If this developer would have been insured by Heffernan Insurance Brokers’ program for Tax Credit Housing Developers, they would have had an entirely different outcome. In fact, they might have saved themselves nearly $730,000 in added expenses of unfunded liabilities. And, if the scenario was different and the tenants were required to be out of the building for over a year, the Heffernan package would also include tax credit recapture, if the IRS tax credit was lost.
Want to make sure your tax credit property is properly insured against scenarios like this? Contact the Heffernan Real Estate Practice today.
Kent Short, firstname.lastname@example.org, 661-304-2647
Joe Naworski, email@example.com, 415-244-3774
John Vipiana, firstname.lastname@example.org, 415-808-1319