11 hours ago
- Business
- San Francisco Chronicle
California insurance crisis could have dire consequences for affordable housing
Insurance bills have always been on the high side for Episcopal Community Services, a San Francisco nonprofit that operates more than 2,000 units of permanent supportive housing and serves a population insurers deem risky.
But over the past few years, ECS has seen insurance costs skyrocket. Its premiums rose 84% last year, on top of 10% and 15% increases the previous two years. At the same time, ECS' deductibles quadrupled last year and reached $100,000 for some properties, forcing ECS to cover most of its own claims. Those rising costs were a factor in ECS' decision to lay off six employees this year, and staff members fear that continued increases could jeopardize essential but expensive ECS services, like the homeless shelter it operates or the seven hotels it leases for supportive housing.
'If we're gonna continue to operate the housing, we have to pay the insurance,' said Chris Callandrillo, ECS' chief program officer. 'We've got to get that from somewhere, and that burden is huge.'
Across California, affordable housing developers say they're being squeezed by ever-rising premiums, increasingly convoluted coverage arrangements and deductibles so high that they're self-insuring for all but the most catastrophic losses. Advocates are pushing the federal government for relief in the form of subsidies for risk mitigation or the creation of a federally backed insurance product, but few solutions appear likely in the short term.
According to an analysis of over 130 California properties financed by a key federal low-income tax credit and included in the national nonprofit Enterprise Community Partners' portfolio, median annual per-unit insurance expenses increased 142% from 2019 to 2024, from $409 to $989. From 2022 to 2024, some California affordable developers reported insurance expense increases as high as 500%.
Without intervention, affordable housing providers say, these ballooning costs could force cuts to staffing or on-site services and imperil future projects at a time when demand for affordable units is as high as ever.
The problem goes far beyond the affordable housing sector; statewide, insurers have sought perennial rate hikes, nonrenewed customers or ceased writing new policies as they grapple with wildfire-fueled losses and high construction costs.
But over the past few years, insurance costs for affordable housing developments have been about 25% higher than for market rate developments in the same areas, said Jordann Coleman, senior vice president at Walnut Creek-based Heffernan Insurance Brokers, whose client base is 40% affordable housing. And affordable housing developers say they're especially vulnerable because they're already operating on razor-thin margins — and because unlike for their market-rate counterparts, the law limits their ability to pass on costs to tenants.
'Somebody's got to come up with a way to pay for that, and for us, it can't be rent,' said Linda Mandolini, CEO of Eden Housing, a Hayward developer with dozens of Bay Area affordable housing complexes. The amount Eden Housing has paid for insurance has risen every year since 2018, including a 20% jump this year on top of a 28% jump the previous year.
Insurers have long considered affordable housing riskier to underwrite than market-rate housing — especially permanent supportive housing, where formerly homeless residents less used to living inside can spark fires or cause damage. But developers say insurance costs are out of step with claims, and they don't seem to take into account efforts to mitigate risks — such as hiring more security or replacing gas stoves with electric ones — or how affordable complexes can make neighborhoods safer and spur economic development over time.
One insurer that writes policies for affordable housing developers declined to comment on its rationale for increasing premiums and deductibles, and another insurer did not respond to a request for comment.
Before around 2020, it was possible to find a single insurer willing to underwrite an affordable housing provider's whole portfolio of properties, Coleman said. Now, she's sometimes working with up to 12 different insurers to piece together more scant coverage with higher deductibles — and each insurer has its own set of questions and restrictions.
Coleman said she is increasingly reliant on more complicated risk-sharing arrangements, such as 'insurance towers' — Jenga-like stacks of policies where different insurers underwrite fractions of a single property (one of ECS' properties is underwritten by six insurers, Callandrillo said). In cases where clients have preexisting contracts that require lower deductibles than insurers are willing to grant, Coleman has also turned to deductible buy-down policies — additional coverage from a separate insurer that pays the difference in the case of a claim.
'The work is exponential, not just for us, but for our clients as well,' Coleman said. These days, it's rare that she has more than one option to offer a client.
Most affordable developers are already working on shoestring budgets stretched thin by rising construction costs and still recovering from lower revenue from tenants who got out of the habit of paying rent during COVID-19. Because most expenses are nonnegotiables, such as payroll and maintenance, keeping up with insurance payments can mean dipping into funds earmarked for longer term projects.
'This is really depleting our property level reserve, our rainy day fund,' said Janelle Chan, CEO of East Bay Asian Local Development Corp., which has developed about 2,500 affordable units in Oakland. The nonprofit has diverted $12 million from its reserves over the last few years to pay for property expenses including insurance, increased utility costs and rent collection deficits, she said.
As part of belt-tightening measures, the East Bay Asian Local Development Corp. is considering cutting community programming or stripping nice-to-have features from planned projects, Chan said.
But if premiums stay high, affordable developers say, future projects could be in jeopardy if insurance — a prerequisite for securing loans — is just too expensive, or if developers' reserves have been too depleted to buy properties in the first place.
'We might have to put stuff on hold,' Mandolini said. Among Eden Housing's pipeline of 4,500 planned affordable homes is a complex for seniors at risk of homelessness in San Jose, converting the former Richmond Health Center into dozens of units of permanent supportive housing, and a 119-unit Liberation Park intended to revitalize a historically Black neighborhood in East Oakland.
There's another even more serious risk: If mounting expenses cause developers to default, foreclosure can wipe out a property's low-income housing use designation — a more permanent setback for constructing affordable units. 'That's just a critical loss that can't be allowed to happen,' said Thom Amdur, senior vice president for policy and impact at Lincoln Avenue Capital, which invests in affordable housing across the country.
Delays or defaults could threaten the region's ability to meet its housing goals. The Bay Area is required to plan to build close to 450,000 new units by 2031, of which 40% should be allocated for low- or very low-income residents, according to the state's Regional Housing Needs Determination.
Affordable developers want the government to step in, either by subsidizing risk mitigation efforts or by stabilizing the insurance market through creating a federally backstopped insurance product or expanding FAIR plans — state-created insurers of last resort, such as the one in California — to cover more affordable housing. California lawmakers are considering a bill, AB1339, that would require the Department of Insurance to conduct a study on barriers to affordable housing insurance statewide.
For now, developers continue to feel the squeeze.
'We're being asked to build more, and yet we are struggling to protect what we have,' Chan said. 'The candle's burning at both ends.'
