The Risk You Didn’t Underwrite: How Policy Changes the Cost of a Deal

By Christopher LoGrippo, CPIA

Partner, IHS Insurance Services | 10M Member

Investors are trained to look at numbers.

Purchase price. Interest rate. Rent. Taxes. Cap rate. Renovation costs. Operating expenses.

But one of the biggest mistakes an investor or business owner can make is treating risk as something to deal with after the numbers work.

Risk is part of the numbers.

A change in regulation, labor requirements, occupancy, technology, insurance markets or building use can change the economics of an investment without changing the purchase price by a dollar.

That is why the question should not just be:

Does this deal work?

It should also be:

What could change the cost of owning it?

That question matters more now because the rules surrounding real estate and business ownership are changing quickly.

New York recently became part of a national debate over the use of algorithmic rent-pricing technology. The state enacted restrictions aimed at certain software used to coordinate rental pricing among property owners. In late September, a federal judge issued a preliminary injunction blocking enforcement of part of that law while the constitutional challenge continues. The ruling is preliminary, not a final decision on the law itself.

The legal issue is important.

But for investors, there is an even bigger lesson.

Technology, regulation and risk are becoming increasingly connected.

Policy Can Change the Economics of a Deal

Investors naturally focus on the expenses they can see.

Property taxes.

Insurance premiums.

Payroll.

Utilities.

Maintenance.

Debt service.

But policy can change several of those numbers after an investment has already been made.

A new labor requirement can affect payroll.

A new building standard can create capital expenses.

A change in occupancy or use can affect insurance.

A new technology regulation can affect how a business operates.

A change in liability exposure can affect coverage requirements.

None of these necessarily changes what you originally paid for the property.

They change what it costs to own it.

That distinction matters.

A deal that works at one expense level may look very different if several operating costs move at once.

Insurance Should Be Part of Underwriting

Too often, insurance becomes one of the last calls made before a closing.

It should be one of the earlier conversations.

At IHS, we spend a lot of time understanding how a business or property actually operates before determining what coverage makes sense.

That includes the property itself, the people involved, contractual obligations, operations and the exposures that may not be obvious from the purchase price alone.

IHS works across commercial and personal insurance, and its commercial process includes evaluating operations and contractual coverage requirements rather than treating insurance as a generic product.

For an investor, the insurance question should not simply be:

How much is the premium?

It should be:

What risk am I actually transferring for that premium?

There is a very big difference between buying inexpensive coverage and properly protecting an asset.

When the Property Changes, the Risk Can Change

Real estate rarely stays exactly the way it looked on closing day.

A property gets renovated.

A tenant changes.

Occupancy changes.

A building becomes partially commercial.

An investor adds amenities.

A contractor begins work.

Employees are hired.

Equipment is added.

Technology becomes part of the operation.

Any one of those changes can alter the risk profile.

That does not automatically mean coverage becomes dramatically more expensive.

It means the investor should understand whether the policy still matches the property and the operation.

The worst time to discover a gap is after a loss.

Technology Is Creating New Questions

Technology is helping investors move faster than ever.

Property-management platforms can organize tenants and payments.

Software can recommend rents.

AI can analyze markets.

Automated tools can model returns.

Online systems can manage contracts, customer information and financial data.

Those tools can create enormous efficiency.

They can also create different types of exposure.

The current New York fight over algorithmic rent-setting is a good example.

The question is no longer simply whether a landlord can use technology.

The questions increasingly include:

What data does the system use?

Where does that data come from?

Is competitor information involved?

Who is responsible for the recommendation?

What happens when regulation changes?

What happens if a tenant, regulator or business partner challenges how a decision was made?

That is not an argument against technology.

It is an argument for understanding the technology being used inside your business.

Cyber Risk Is Real Estate Risk Too

A landlord or real estate investor may not think of themselves as running a technology company.

But look at the information many businesses now hold.

Tenant names.

Addresses.

Banking information.

Payment information.

Leases.

Employee records.

Vendor information.

Access-control information.

Email accounts.

Cloud-based documents.

That creates exposure that did not traditionally sit at the center of a real estate underwriting conversation.

Today, it should be part of it.

The physical property may be the asset investors can see.

The information connected to that property can become an asset — and a liability — as well.

The Cheapest Option Is Not Always the Lowest-Cost Option

Investors understand this principle everywhere else.

The cheapest contractor can become very expensive if the work has to be done twice.

The cheapest renovation can become costly if it creates another problem.

The cheapest financing can become expensive if the terms limit what you can do later.

Insurance is no different.

The objective should not simply be minimizing premium.

It should be understanding what you are buying, why you are buying it and whether it actually protects the risk you are taking.

Sometimes the lowest-cost option is exactly the right one.

Sometimes it is not.

The decision has to begin with understanding the exposure.

Ask Better Questions Before the Deal

When reviewing an investment, I would encourage investors to add several questions to the traditional underwriting process.

What changes if the property’s use changes?

What coverage will lenders or contracts require?

What happens if construction begins?

Are employees or independent contractors involved?

What technology platforms will hold sensitive information?

Could a regulatory change materially increase operating costs?

What insurance assumptions are built into the projections?

And perhaps most importantly:

What risk am I assuming that is not showing up on the spreadsheet?

That is the question that can change a deal.

Risk Is Part of the Return

Every investor wants return.

But return does not exist without risk.

The better investors become at understanding risk, the better they become at understanding the deal itself.

My background before insurance was in fixed income at J.P. Morgan. That experience taught me to look at risk as part of the decision, not as something separate from it. Today, working with individuals and businesses at IHS Insurance Services, that same principle applies.

The numbers matter.

So does what can change them.

Policy changes.

Technology changes.

Markets change.

Businesses change.

Properties change.

Your underwriting needs to account for more than what is true today.

Because if the economics of a deal only work before you price the real risk, you haven’t finished underwriting the deal.

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