COVER STORY, JANUARY 2010

CONTROL CENTER
Loss control techniques can make multifamily properties more profitable.
By Patrick Nugent

Net operating income (NOI) is the straw that stirs the commercial real estate drink. Anything that can be done to increase NOI will help increase the value if an asset. Growing revenues is one way to boost an asset’s NOI. Another way is decreasing expenses, but very few expenses can be reduced. One of the expenses that can is property and casualty insurance premiums.

Multifamily properties are more susceptible to losses than other commercial real estate asset classes. Typical garden-style apartment frame construction is more prone to significant smoke or fire damage. A Texas hail storm can take out 20 or more roofs in one afternoon. Poor exterior lighting can be blamed when a resident is the victim of an assault. The list goes on, and the more losses an insurance underwriter sees, the higher the insurance premium will be. And while some losses are beyond an owner’s or property manager’s control, there are quite a few that can be reduced or even eliminated by employing certain loss control techniques.

Tenant-related fires account for a significant amount of losses for apartments every year. In fact, the National Fire Protection Association estimates that 300 apartment fires occur every day in the United States. The good news is that tenant-related fires are largely avoidable by enforcing a few simple policies:

• Apartment communities should not allow residents to cook on barbecue grills located on their balconies, or even within 10 feet of any building

• Candles should not be allowed in units. It may seem a little over the top, but candles are a major fire hazard, causing over 15 percent of apartment fires. Plug-in scent dispensers are a good alternative.

• Fire extinguishers should be located just outside the kitchen. Most fires are kitchen related — and by locating it outside the kitchen instead of under the kitchen sink — a potentially large fire can be limited substantially.

• Management should take time to explain to each resident how to use a fire extinguisher. Keeping an empty one in the office for a brief demonstration is a good idea. Because fire doubles every 30 seconds, a knowledgeable resident can extinguish a fire quickly, preventing it from becoming a disruption to the community.

• If your fire extinguishers in the communal laundry room have a tendency of walking off, try putting a mirror front on the case instead of glass. It’s proven that mirrors won’t be broken nearly as often.

• Laundry rooms should have metal, not plastic, trash cans. The metal trash cans can better contain a fire should one start.

• Smoke alarms should be checked on a regular basis to ensure they are in proper working order. As of January 1, 2010, Texas apartment owners will be required to purchase and install visual smoke alarms upon request for the deaf, hard-of-hearing or deaf-blind tenants.

• Overloaded extension cords are also a major cause of fires. Management should develop and implement a procedure to inspect units every 90 days; during this process they should inspect extension cords. All power cords should have an internal fuse protector and they should never be connected to each other.

While property losses may occur more frequently, liability events can be particularly damaging to apartment owners. It is critical to take steps to make your community safer, as well as more defensible in the event of a lawsuit.

Swimming pools are a major landlord liability. Many of the largest liability claims are pool-related, typically involving a drowning due to inoperable pool gates or unattended children.  Pool gates must function 100 percent of the time. All apartment personnel should be in the habit of checking the gates every time they walk by. Further, life-saving equipment must be accessible and depth markers must be clear.

Not only is it important to screen potential residents, but screen employees as well. Failure to screen employees opens up landlords to huge liability claims. There have been some large jury verdicts against apartment owners whose employees have harmed residents, especially when it is revealed that the employees have criminal records that were not checked by the employer.

Speaking of criminals, limited access gates are a proven deterrent to crime, but, they have to be in working condition to be effective. Broken gates can be a liability for the landlord once a rape or assault case reaches the courthouse. If your property’s gates are not working and you have no plans to repair them immediately, you should remove them to eliminate the appearance of and liability for limited access. If your gates become damaged and repairs are scheduled, post a notice on the gate stating such. It is also important to keep residents informed of criminal activity in the area. Failing to notify your residents will not look good to a jury if a resident is a crime victim.

Additionally, apartment owners have a duty to ensure their tenants have a safe and sound walking surface around the property. Trip-and-fall accidents are one of the most common liability claims brought against owners. There are several steps that can help reduce the frequency of these types of accidents, from putting a non-slip surface on all stairs to painting all parking blocks and speed bumps yellow.

The benefits of a comprehensive loss control program cannot be overstated.  It is important to have a safe property for your residents — that alone is reason enough. But the financial benefits are an added incentive. Tenant retention and occupancy will increase as a result of a safer community, and the fewer losses you have, the better your insurance premium will be.

Patrick Nugent is a producer with Commercial Insurance Solutions Group in Dallas.

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