Continuing Spike in Property Insurance Leads to 4.3% Increase in LIHTC Expenses in 2021

Published by Kelly Gorman on Monday, November 28, 2022 - 12:00am

Operating expenses at low-income housing tax credit (LIHTC) properties tracked by Novogradac in 2021 saw their second-biggest increase since Novogradac began tracking the data, with a significant jump in property insurance among the key reasons.

Operating expenses increased 4.3% over 2020, compared to a 0.8% increase in rental income, according to the Novogradac Multifamily Rental Housing Operating Expense Report, 2022 Edition , released today. Novogradac began tracking such data in 2010 and the only year with a larger year-over-year increase in expenses was 2019, when expenses climbed 6.8%. The combination of the significant growth in expenses and relatively flat rate of rental income growth meant that net operating income (NOI) dropped 4.0% in 2021. However, NOI was the second-highest level in the 12 years for which Novogradac has tracked such data and NOI has increased at a 3.8% compounded annual growth rate (CAGR) since 2017.

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While the increase in operating expenses is largely attributable to general inflation during 2021, the single biggest factor in the rise was property insurance, which jumped a record 33.5% in 2021, accounting for an increase of $129 per unit–which comprised 53.9% of the overall increase of $240 per unit in expenses.

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It is not a one-year aberration. Over the previous four years, property insurance outpaced the overall growth rate in expenses with combined increase of 87.6% over that period. In 2021, the increase in property insurance was consistent across types of properties and geographic regions. Among the 15 states with at least 12 LIHTC properties in Novogradac’s data set, 12 saw increase in property insurance expenses–and most saw significant increases.

Property owners and managers should take note of this trend, which is fueled by a series of natural disasters. In 2019, 2020 and 2021, there were a combined 56 natural disasters in the United States that caused at least $1 billion in damage. The natural disasters and other factors (including social inflation, which is defined as legislative and litigation developments that affect insurers’ legal liabilities and claim costs) have resulted in a reduction in the number of insurance carriers. That means property owners may find fewer options.

The result is that property insurance is increasing across the board, although the amount paid per unit depends largely on geography. For instance, the Florida apartments in the Novogradac data set paid a median of $800 per unit for property insurance, while those in Maryland paid a median of $332.

Property insurance has a 7.9% CAGR over the 12 years for which Novogradac has data, significantly higher than the overall CAGR for all expenses of 3.2%. The median expense for property insurance in 2010 was $223 and for 2021 it was $514–with $240 of the overall 12-year $281 increase coming in the past five years.

LIHTC stakeholders should be aware that property insurance continues to grow and take care to prepare for ongoing increases.