Student-housing owner/operators avoid losses by understanding and mitigating the risks of the markets.
Much like their counterparts on the conventional multifamily housing side, student-housing owner/operators are continually attempting to attract more residents and increase occupancy while protecting their assets. But protecting those assets perhaps poses a greater challenge in student housing by nature of the residents themselves, and the unique situations that come with them. Understanding the risks involved and the means to help mitigate those risks are key to keeping one step ahead of a very unique and unpredictable market.
With student housing, the risk exposure is different because of the occupancy, notes Alex Glickman, who leads the worldwide real estate and hospitality practice for Arthur J. Gallagher Risk Management Services.
“Underwriters look at student housing as a higher risk factor on the property side because, unfortunately, with students there are stranger situations, such as increased vandalism, malicious mischief and higher fire losses,” she says. When it comes to general liability, there is a much higher rate of liability claims because of the “strange” factor.
“You have students who get drunk and do foolish things like dive off of balconies into swimming pools,” Glickman notes. “In my career, I have sadly seen four of these cases.”
There’s also the issue of security.
“Many parents think that if they are sending Junior off to college, there is someone there to babysit him,” Glickman notes. “So security is of paramount importance because you tend to have an increase in assaults, as well as people whose judgment is impaired due to excessive alcohol and recreational drug use.”
Paul J. Kaliades, president of Students Legal Liability, says the current student-housing environment does not differ from the dynamics and metrics of risk management in conventional market rate apartment rentals.
“Owners/operators of student housing and conventional apartments are required/compelled to have standard property and liability coverage for their communities. However, many housing providers overlook the concealed risk of unprotected residents by not requiring their residents to obtain property damage liability protection or renters insurance. The challenges similarly shared are to transfer the risk back to students/residents for losses they originate in the communities such as kitchen fires, overflowing bathtubs, etc. By transferring the risk, participating residents are financially protected and provide property damage protection for the community.”
John McLaughlin, managing director, higher education practice for Arthur J. Gallagher, encourages owner/operators to have a clear understanding of some of the unique legal responsibilities that colleges and universities are required to comply with and what, if any, responsibility the owner/operator has to track, report and respond to those issues.
Some of the better publicized legal and compliance risks are the Clery Act, crime reporting, prevention and response to campus sexual assault, emergency response procedures and responsibilities, and substance abuse.
“It’s very important that contracts address these risks, clearly spelling out the expectations and responsibilities of both parties,” says McLaughlin. “Clearly legal needs to be reviewing the contracts, but owner/operators need to make a point of asking clients about critical risks. Operators may find there is an opportunity to help colleges address these issues.”
John Carr, area executive vice president for Arthur J. Gallagher, says there are three strong reasons why student property housing managers should consider requiring all student residents to have a special form of renters insurance:
- Having financially responsible residents helps guard the management company against claims for bodily injury and property damage resulting from the actions of residents. “When students have liability insurance in their name, they can handle both the legal costs as well as damages resulting from their legal liability,” Carr explains.
- Regular homeowner and “renters” policies fail to cover nearly half of all the property losses suffered by students. “Students and their parents often present their claims for loss to the property manager,” he says. “This can result in an adversarial relationship with your customers because the lease clearly states you are not responsible for damage to resident property.”
- Providing an amenity that protects the resident’s personal property against all the loss causes experienced by college students can also be a revenue enhancer for the management company.
Additionally, Carr points out that some property management companies mandate residents purchase liability insurance, or they may purchase a blanket policy that covers the limited liability of residents for damage to their residential unit from fire, smoke or explosion damage. These options address a part of the management company exposure but leave the vast number of resident property, as well as the more frequent liability exposures for the management company, uncovered.
The best solution, Carr says, would be for residents to have an “All Risk” coverage form for their personal property and liability coverage for both bodily injury and property damage, including damage to their dwelling unit caused by fire, smoke, water or explosion.
“We have worked with property management companies to structure resident insurance solutions that satisfy their desires, whether it is liability only, personal property only or both combined,” he says. “The costs per resident can range as low as $5 per month or $60 per year to upward of $10 per month or $120 per year. The actual price depends on a number of coverage and underwriting variables.”
Campus Apartments, one of the nation’s largest developers, owners and managers of student housing, requires its students to have renters insurance, which covers any damage to their belongings and also has a low general liability exposure to cover damage to the property. Residents can obtain renters insurance through their own provider or a Campus Apartments recommended vendor.
“For our vendors, we classify each as low, medium or high-risk, depending on the type of service they provide,” notes James A. Smith, senior vice president and chief financial officer at Campus Apartments. “The amount of coverage they are required to have varies upon their level of risk. We require general liability, workers compensation, excess liability and product liability with up to $5 million in coverage.”
College students renting an off-campus apartment or house while away at school should also consider purchasing renters insurance to protect their personal property (such as a computer, television, stereo, bicycle or furniture), says Larry Feld, vice president of DepositIQ, a leading provider of surety bonds to the multifamily housing industry.
“Even if a student is a dependant under his or her parent’s insurance, the student’s personal property, in many cases, is not covered if the student lives off campus,” Feld explains. “Parents should check their policy or contact their insurance agent to see if renters insurance is right for their son or daughter who is away at school.”
Assessing and Mitigating Risk
Most would agree that developers should do everything they can to mitigate loss before it happens. Like many businesses today, Campus Apartments looks at risk management as a continuous process, according to Smith.
“As a student housing operator, Campus Apartments is entrusted to maintain the well-being of other people’s children, and we take that role very seriously,” Smith says. “Crisis situations, lawsuits and employment issues can come up at any time, so we are always prepared and constantly evaluating our risk to ensure that situations are handled safely and efficiently.”
Risk assessment for students legal liability (SLL), according to Kaliades, is simply the common sense reality that students/residents will consciously or unconsciously cause losses in concert with the day-to-day happenings of living in student-housing facilities, i.e, kitchen fires, overflowed showers/bathtubs, carelessly smoking, overloaded electrical outlets, etc. The assessment is easily discernible with statistics, analytics and actuarial figures readily obtainable.
For example, the most recent National Firefighters Report stated that 69 percent of all habitational fires are caused by residents. The SLL program monitors these risks through its proprietary online administration system, which is included in the program. SLL also may monitor through an automated process with the community’s property management software. It creates automatic monthly administration and reporting, and all communications and processes are generated through an integrated portal in the community management software or through the RLL secured website via the Internet. Each community receives a unique and protected password to access these functions on the community level and/or corporate level. The community receives continuous monitoring and tracking of the resident’s requirement to possess property damage liability protection in compliance with the lease agreement.
Glickman says she helps Arthur Gallagher clients assess risk with a security measures checklist of sorts. Do the assets have sprinklers? How many stories are there? Are there any particularly difficult exposures? Are the schools in high-crime areas?
“If they are developing a property, they absolutely want to put sprinklers in, regardless of code,” she notes. “If they are purchasing an asset and they have an opportunity to retrofit for sprinklers, it’s a very good investment. It also can help alleviate some of the deductibles because the underwriters will look for higher deductibles on larger portfolios, typically anywhere from $25,000 up to $250,000 per occurrence.”
If a property includes kitchens, Glickman highly recommends installing under-the-hood fire suppressant systems ($20 boxes that have a fire retardant that effectively discharges if there is too much heat or a stove fire).
If an operator is including a gym or other amenities, there is exposure to loss of contents, she notes.
“In terms of just the actual physicality, you tend to see more theft and direct damage to contents in student housing. Amenities are frequently swiped or broken.”
Owning real estate that is utilized by students also requires the owner/operator to be more vigilant relative to security and warnings.
“We have one client who is buying an asset with tanning beds, which they consider to be an amenity, but it’s also a huge hazard,” Glickman notes.
And similar to senior housing, if a property is in an area where there’s snow and ice, operators should have stringent ice remediation programs, according to Glickman.
“So the same thing applies with student housing — know thy audience. Understand that students’ judgment can be clouded, and take extra precautions. Good owner/operators should post warnings everywhere.”
Educating All Parties
In addition to assessing risk and posting warnings, education is key when it comes to limiting exposure and protecting student-housing assets.
Educating residents is a top priority and continuous process for Campus Apartments. When students move into a property, they receive a resident handbook, which includes information on renters insurance, safety tips for situations inside the unit and around the property, as well as guidelines for serious maintenance issues, such as a flood or frozen pipes. If a situation takes place on the property, management notifies all residents to ensure they are aware of the incident and are taking proper precautions. On-site security is also available at all properties to keep residents safe.
Glickman also encourages communication. This can be through obtaining students cell phone numbers and sending text message blasts (how students tend to communicate) or motivating them with social functions or contests.
“We’ve seen this in affordable housing where they try to motivate tenants to take better care of the assets,” Glickman notes. “Some operators will do a monthly update, for example, where students come to the office, read the tip of the month and get a buck. Or they serve ice cream along with instruction on security and safety. Students tend to like to play games and are motivated by prizes.”
Campus Apartments also educates its employees through numerous crisis management training programs, including online training and real-time mock crisis scenarios, according to Smith.
“Ongoing crisis preparation and training is critical for reducing exposure to risk,” he says. “We try to anticipate as many situations as possible before they even happen to ensure our employees and residents are prepared.”
— Susan Fishman