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Flood Risk: Real Estate Risk Allocation, Attitudes, Mitigation and Opportunities


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Michael Berman, Berman Consulting and former CEO of CW Capital
In the wake of last year’s destructive storms, this track explores how flood risk is measured in today’s deals, and whether we as an industry are doing enough to advocate for property owners. Leading experts will tackle why the real estate finance world, including both debt and equity investors, has largely ignored the long-term impact of increased flood risk and what risk management tools make sense in today’s underwriting.

Published in: Real Estate
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Flood Risk: Real Estate Risk Allocation, Attitudes, Mitigation and Opportunities

  1. 1. Flood Risk: Real Estate Risk Allocation, Attitudes, Mitigation and Opportunities Presented to EDR - PRISM May 9, 2018 Presented by: Michael D. Berman– Principal of Michael Berman Consulting, LLC Fellow – Penn Institute for Urban Research Senior Industry Fellow – Harvard Joint Center for Housing Studies Center for American Progress – Mortgage Working Group Former Senior Advisor – Housing Finance to HUD Cabinet Secretary Shaun Donovan Former Chairman of the Mortgage Bankers Association Former CEO of CWCapital, LLC
  2. 2. Topics for Today 1. Introduction and Overview of US Real Estate: valued at about $45T, consisting of $30T Single Family ($10T debt) and $15T Commercial Real Estate ($3T debt) – compare to size of US Stock market capitalization $25T ; RE is apprx 15-18% of GDP; CRE lenders market 2. National Flood Insurance Program 3. Case Study in Miami Beach - New Technology and Flood Projection: Coastal Risk Consulting 4. Attitudes of RE Lenders and Investors - Current Flood Risk Biases 5. Berman Paper: Flood Risk Mitigation – A Call to Action 2
  3. 3. CRE Debt Outstanding and Origination Volume 1. Gross CRE Debt Outstanding $3.18 T (12-31-17) including $1.2T MF 2. The Players – Total Outstanding Balances (12-31-17): • Banks: $1.3T (41%) – originations apprx $170B/yr • GSE/FHA: $606B (19%)- originations apprx $160B/yr • Life Co: $468B (15%)- originations apprx $70-75B/yr • CMBS,CDO: $441B (14%) – originations apprx $95B/yr • Other: $365B (11%) (REIT, Fin Co, State/Local Bonds) 3
  4. 4. NFIP Top 10 States- Policies in force (5.1 million) 4
  5. 5. Premium Escalation Nightmare after BW12 5
  6. 6. Miami Beach – Case Study • $500 Million committed to flood resiliency – 40 year projection – Raising seawalls – Installing 80+ Pumps – water quality issues – Raising roads – drainage and “Basement” insurance issue – Real estate tax implications – Progress on building codes and zoning? Example of new Convention Center and new utility conduits under the streets – PLUS: Miami-Dade County future septic conversion - $6- 8B? 6
  7. 7. Miami Beach – Case Study of RE Acqusition • Berman due diligence prior to purchase of condo on Allison Island - Coastal Risk Consulting Report re 6101 Aqua Avenue, Allison Island, Miami Beach 7
  8. 8. Attitudes of RE Investors, Lenders, Other Players • December 2017 Survey of 20 Lenders, Investors in equity and debt (B Pieces), Brokers re Florida Coastal Properties – SF, MF and CRE (immediately following Hurricanes Harvey, Irma, Maria) • Factors: – Term of investment – 3 to 20 years – Use of Property impacted by tidal flooding or coastal flooding – Flood insurance - potential cost increases – Number of days of tidal flooding – Value impact based on increased expenses (NOI)– ins, RE taxes for infrastructure improvements (eg, Miami Beach) 8
  9. 9. Berman Paper: New Metrics and Incentives - 1 Hypothesis: Follow the Money - Who takes flood risk: property owners, lenders, guarantors, flood insurers, reinsurers (note Rating Agency role) - Who can profit: engineers, architects, building materials manufacturers - What about local and regional economies Today’s tools for measuring flood risk - 100-year floodplain and mapping - Base Flood Elevation per building Lending world: Binary flood insurance criteria based on 100-year FP No standard metrics for building design or materials 9
  10. 10. Berman Paper: New Metrics and Incentives -2 • Comparisons to Seismic Risk and Wind Risk • Florida wind building codes; what about flood? • California seismic building codes; flood? • Lending programs at GSEs and FHA – “Green” and “Affordable Housing” – incentives – why? • American Society for Testing and Materials – ASTM E026-16A and ASTM E2557-16A: certified engineer protocol with Probable Max Loss (PML) and Scenario Expected Loss (SEL) scoring at particular location of each building (vs Zone 4) 10
  11. 11. Berman Paper: New Metrics and Incentives -3 A Call to Action – 4 items - ”Follow the Money” • 1. Create a new Flood Risk Metric Standard - engineer report • 2. Create minimum Metric Score for Financing • 3. Create second mortgage programs for resilency • 4. Lower flood insurance premiums, G Fees, and MIP for properties with certain Metric Scores Goals: Municipalities change building codes; architects designs and building materials are adapted; change behavior of owners 11