Profitable Protection

Tenant Insurance Boosts Bottom Line

It took the devastation of Hurricane Harvey in Texas to impress upon residents the value of having insurance to protect their belongings. While flooding caused much of the devastation from that storm, which is only covered by a specialized federal insurance program, local people still heard a loud and clear message.

“Since the hurricane, people are a lot more attuned to having coverage for their belongings than they might have been,” confirms Paul Rasplicka, who operates nine LockTite Storage facilities in Texas. “New tenants, especially, are very attuned to having insurance on their stuff. Insurance is not as hard of a sale that might have been a few months ago.”

Tenant insurance has risen higher in the consciousness of storage customers recently, not only because of natural disasters but also since more operators are requiring both current and new tenants to have coverage on their goods. In addition to generating income for the facility, insurance programs help to reduce liability issues that may arise after a tenant loss.

A growing number of operators are putting “evidence of insurance” policies in place, where customers are required to either present a homeowners/renters policy to prove they have off-site coverage of goods, or purchase a tenant insurance policy offered at the facility.

“We’re seeing more operators having evidence of insurance requirements within their facilities and, as a result, you’re having higher participation levels,” says Mike Schofield, president and CEO of Phoenix-based MiniCo Insurance Agency.

“We’ve seen current operators under the MiniCo program that were not requiring evidence of insurance go from below 10 percent participation to over 50 percent in a month,” adds James Appleton, MiniCo’s director of sales and special risk.

He says that some new customers are surprised when facilities still don’t require insurance coverage, because so many storage operators have evidence of insurance programs. “It’s no longer a surprise,” Appleton says. “It’s becoming an expectation.”

I-17 Thunderbird Self Storage in Phoenix announced to its customers that the facility would require evidence of insurance for all tenants beginning in January. Manager Terry Woodworth says the facility’s staff mentions the insurance requirement when customers contact the facility either by phone or in person.

Potential tenants learn of the requirement during walkthrough while they are touring the facility. “They’re told during walkthrough that we require insurance and they have two options, either bring in a copy of a homeowners or renters policy or to take the one we have available,” Woodworth says. “100 percent of our new tenants have taken the insurance without hesitation.”

One reason for that success rate is the zero deductible MiniCo and other insurance providers offer. MiniCo offers TenantOne Direct insurance and a Pay-With-Rent plan that allows customers to pay the monthly premium with their rent payments.

MiniCo provides replacement cost coveragefor covered losses, and a claim doesn’t reflect on the tenant’s homeowner insurance policy. Although storage customers’ homeowners or renters insurance  policies may cover items stored away from home, these policies may have a deductible of $500 or more.

With tenant insurance, no matter how small the loss, a claim can be filed without impacting their homeowners’ rates. Some customers who file small claims against their homeowners or renters insurance policies find the insurance company will raise their premiums or possibly drop the coverage entirely. This claim history also may follow the customer for years, even if they attempt to change insurance companies.

“The majority of people I’ve spoken to with regard to [insurance] are in favor of the idea, particularly the fact that there is zero deductible,” Woodworth says. “One gentleman talked to his homeowners insurance company and, while they would cover it, there is a $1,500 deductible for anything he has stored off site. He is sending me a check for the entire year to make sure he is covered, because it’s a much better deal than his homeowners.”

LockTite, which also has an insurance requirement, switched its tenant insurance plan to MiniCo last May. “One reason we switched to MiniCo is it’s easier for our managers to sell,” Rasplicka says. “Part of the genius of the form is it’s part of the leasing process that the manager has to address. Our participation was real low; it’s gone up a lot on new leases.”

Avoiding Hassles And Legal Issues

Another benefit of some insurance programs is that they provide a way to document that the tenant was offered an insurance option, in the event of a later loss or legal action.

LockTite offers tenants the option to present their homeowners policy, buy the MiniCo product, or sign a waiver stating that they declined the insurance.

“The benefit to us is that if anything occurs to one tenant or many tenants, they’re not going to look to us for resolution,” Rasplicka says. “We presented it to them, they were offered three options, so they’re not looking to us to resolve their problem. It transfers risk out of our responsibility because it was addressed up front.”

When customers sign up for insurance, the burden on managers and owners is reduced should a future loss occur at the facility. If the tenant declines the coverage, that documentation is a valuable asset should a customer later file a small claims court case.

“If there’s a fire or catastrophic loss, you don’t want the manager fielding angry calls,” Appleton says. “Having the ability to have an arm’s length relationship with your tenant and maintain positive relations and knowing you can rely on a claims department in the insurance company to handle the tenant’s needs, that helps a facility considerably.”

Successful insurance programs are offered as a customer service foremost. “People see it as a service, and we’ve gotten a lot better presenting it that way,” Rasplicka says. “I’m encouraged by how that’s working for us.”

Managers who take the time to discuss tenant insurance with every new customer perform a valuable service to both the tenants and the self-storage operation. Many customers assume that the storage facility will reimburse them for the value of their lost or damaged items in the event of a fire, severe weather event, or burglary. That’s not the case, since the owner only provides rented space and not the care, custody, and control of items.

Customers who have insurance coverage are less likely to make a claim against the facility in the event of loss or damage to their stored goods. The insurance provides them recourse to be made whole that does not involve the facility.

“We’re still a customer service industry, and it needs to be demonstrated to the tenant that this is in their best interest,” Appleton says. It’s good customer service, it’s good to reduce the facility’s liability, reduce the tenant’s liability, and it’s a revenue source.”

Bottom Line Revenue

Depending on state laws, operators can earn administrative fees or commissions that can generate a significant return on investment (ROI) by offering tenant insurance. As that revenue grows, it eventually trickles down to the bottom line of the balance sheet and ultimately adds to the value of a facility.

Tenant insurance represents recurring monthly income that is a predictable revenue source, which potentially makes it among a facility’s most profitable offerings.

“I would say it would surpass selling ancillary products in terms of the volume of tenants at a facility versus those that purchase boxes, bubblewrap, and tape,” says Appleton. “If you get your participation rate at a high enough level, then you’re going to be producing recurring income versus one-off purchases. Nobody buys boxes every month, but somebody will pay $9 for coverage every month.”

Adds Schofield, “From an ancillary standpoint, it’s definitely the most lucrative recurring revenue stream.”

It didn’t take Woodworth long to realize that fact at her I-17 Thunderbird store. The facility began offering the MiniCo Pay-With-Rent program in mid-October and, by early December, the results were obvious. “We sell way more insurance than boxes and tape,” Woodworth says.

While operators with an insurance requirement tend to generate a higher percentage of tenant participation, even modest rates can add up to a significant return.

A facility with a penetration rate as low as 21 percent at a 500-unit facility, for example, can earn enough income to offset the cost of the owner’s commercial insurance by generating more than $5,000 annually. When employees are trained to routinely offer the insurance at lease signing, the program can generate annual revenue of $20,000 or more per facility.

A robust insurance program can have a dramatic effect on net operating income (NOI), especially at facilities in locales that don’t command the highest rents. Plus, anything that adds to the bottom line ultimately can boost the value of a business, which is especially beneficial when securing loans or selling the property.

Adding Value

In certain brokerage deals, an established insurance program can be a valuable asset. The buyers stand to generate a lucrative new revenue stream when the seller owns a property with a limited insurance offering, or none at all. Even if an operation has a modest insurance program, tenant insurance could have the biggest upside in a transaction.

If a facility generates $1,000 a month of insurance revenue from an administration fee or commission from the insurance agency, that $12,000 of annual income is the equivalent of an additional $200,000 of worth, assuming the store is valued at a six percent cap rate. Using a formula that divides net operating income by the cap rate, operators can determine how the insurance income potentially adds to the value of a property.

The additional income stream generated from a sustained insurance program can potentially increase an asset’s perceived market value and allow it to qualify for additional loan proceeds as well.

As insurance revenue becomes more of a significant factor in the industry, lenders, buyers, and sellers now see that income stream nearly as predictable as rental from units in terms of calculating facility value.

Besides the boost in property values, income from ancillary products such as tenant insurance can qualify facility owners for higher loan proceeds for refinancing a mortgage or other uses.

Lenders look at the property’s debt service coverage ratio (DSCR) to determine the cash flow available to pay current debt obligations. If the facility is generating extra income each month from ancillary products such as insurance, the additional revenue potentially can be applied to the borrower’s loan amount. That revenue increases the amount of proceeds an owner can get on a loan because there is more cash coming in to service the debt—as long as it is reasonably consistent.

Consistency is the key. The capital markets value ancillary income by examining its sustainability and how long the income stream has been in place. If an owner can demonstrate that the income stream is sustainable based on historical analysis and that there is strong potential for this income to grow, the lender will assign value to the income and lend on the amount of business coming in.

Training Is Key To Success

With more and more tenants and operators realizing the value of tenant insurance, it makes sense to look into starting a program. But owners and managers are not insurance agents, so how can they hope to be successful?

Insurance agencies offering the product usually are required to provide training to certify storage personnel to offer the insurance. MiniCo’s training takes approximately an hour to complete, and it is always available as new employees join a storage business or if any retraining is advised.

MiniCo conducts online webinars with facilities to teach managers and their staffs about the policy coverage, how to offer the program, and overcoming common objections or misconceptions a customer might have.

Woodworth reports the training is “not difficult at all”.

In addition to the instruction, MiniCo provides wall posters and other marketing materials for the facility office to help reinforce the training and emphasize the need for insurance in customers’ minds.

An evidence of insurance requirement is one ingredient of increasing customer participation, but effective training is the catalyst that completes the transaction. A successful program is contingent upon the knowledge and communication skills of the employees offering the insurance.

“It’s consistency and making sure the right message is communicated to the trainee that they fully understand the program,” MiniCo’s Schofield says. “You want them to be trained well enough that they’re communicating the proper message to the tenant. If you have a well-trained group of managers with an evidence of insurance program, it’s going to be quite successful.”

Get It In Writing

To enforce an evidence of insurance requirement, it’s advisable to have some language in the tenant lease stating that insurance is required as a condition of renting space or that management has the right modify the terms of the lease at any time.

“In order to implement an evidence of insurance program, the lease needs to support that position,” Schofield says. “They need to look at their lease and have their agent or legal counsel review the verbiage as it pertains to the insurance requirement.”

Most state storage associations have sample leases that are based on the laws within their particular state, and they typically contain language about the need to secure insurance to store goods. Many self-storage operators model their leases after the state association’s samples.

The lease language in most states is similar to this statement: “All terms, including rent and other charges, are subject to change upon 30 days prior written notice to occupant. Continued occupancy after the effective date of any change constitutes occupant’s agreement to be bound by the change.”

When choosing an insurance agency’s product to offer at your facility, make sure the company has experience handling self-storage claims.

“There are lots of players offering tenant insurance, and it’s very important for the self-storage operator to work with an insurance provider that has dedicated adjusters that know the storage industry, that know the product, and assist their tenants in filing claims and getting settlements,” advises Schofield. “There’s value in working with an AM Best rated carrier that is held to comply to regulatory requirements to protect tenants and the operator.”

New sources of revenue originating from ancillary sales can have a positive effect on the cash flow and the NOI of a property. Ancillary income including tenant insurance generally adds between three percent and five percent to a property’s gross income, although some facility managers have reported it can add as much as 20 percent.

Tenant insurance is another income tool in a diversified set of products that has gained acceptance with more and more customers.

In the mantra of some operators, “If it’s worth storing, it’s worth insuring—it’s got value.”

David Lucas is a freelance writer based in Phoenix, Arizona. He is a regular contributor to all of MiniCo’s publications.