Institutional Residential Lease Guarantees Come to California
Institutional residential lease guarantees are new to the California apartment market and, consequently, are not well known or understood. They represent an attractive opportunity for landlords to reduce vacancies, drive renters to their properties, and eliminate all rent loss, at no cost to landlords or their management companies. Landlords accept the program, renters pay for it.
Developed over twelve years ago by New York based Insurent Agency Corporation, residential lease guarantees are the institutional “mommy and daddy” assisting a broad range of renters in qualifying for their chosen apartment. Young professionals moving to New York (or other major cities) typically do not have incomes sufficient to meet landlords’ credit criteria, generally requiring annual earnings of at least forty times the monthly rent. Alternatively, prospective tenants can use a co-signer (normally parents) with minimum annual incomes at least eighty times the monthly rent. With rents often very high in major cities like New York, many parents do not qualify. Other renters experiencing problems include (i) foreign executives relocating to the U.S. who have no U.S. credit history, (ii) the self-employed, (iii) non-employed U.S. and foreign individuals with significant assets, and (iv) both U.S. and international students.
The solution is remarkably simple and works like other insurance products. A prospective tenant pays a premium (guaranty fee) in an amount equal to a percentage of one month’s rent. On average, the guaranty fee for a 12 to 14 month lease is 65% – 90% of one month’s rent for a U.S. renter and 90% – 110% of one month’s rent for a foreigner without U.S. credit. The landlord is the beneficiary of the Master Policy. If for any reason the tenant fails to pay rent for any period during the term of the lease, the loss is covered as the guaranty covers the full rent exposure under the lease including two months post the end of the lease if the renter holds over. The benefits to renters are clear: they are able to successfully compete in the rental market for apartments they want. For landlords, lease guarantees expand the market for their apartments while eliminating all financial risk under the lease. Also brokers benefit as they are able to close more deals in less time. Lease guarantees, which are normally issued to the landlord in less than twenty-four hours, can be used on a case by case basis, providing an attractive solution to an important niche in the residential apartment market.
The landlord’s decision to accept a lease guarantee is relatively straight forward. Because lease guarantees are backed by large, highly rated insurance companies, the credit quality of the guarantee is substantially stronger than any individual’s personal credit or any individual co-signer. Signup of a landlord’s buildings occurs within hours and requires limited information, including the landlord’s name, a contact person, the name of the LLC owning the building, and the building address for each property. Many of the largest landlords/management companies in the United States now accept institutional lease guarantees; they are also used by landlords with smaller holdings and even owners of individual condominium units.
While residential lease guarantees are new to California, they have been available in New York since the launch of Insurent in 2008. To date, institutional lease guarantees have been issued for leases representing well over a billion dollars of aggregate rent exposure. In California, they will provide a valuable assist to landlords looking to rent more expeditiously. California landlords can now take a maximum of two months’ security, which clearly does not cover the inherent risk in a 12 to 13 month lease. Lease guarantees can expand the pool of renters for California apartments as they do in the New York market where institutional guarantees have been accepted for well over a decade.
As California recovers from the economic dislocation caused by Covid-19, landlords and management companies will make every effort to expand the market for their properties without incurring increased risk. Over time California landlords will become increasingly familiar with lease guarantees and more apartments will be made available to an ever larger audience. As with other innovations, institutional residential lease guarantees create the possibility for everyone to win.
About the author: Jeffrey Geller is Vice Chairman and Chief Operating Officer of Insurent Agency Corporation. Launched in 2008, Insurent (www.insurent.com) created and leads the market in institutional residential lease guarantees. Having issued guarantees on over $1 billion in rent exposure, Insurent is accepted by landlords owning more than 5,000 buildings with over 525,000 apartments in New York, New Jersey, Massachusetts, Virginia, Maryland, Washington DC, Illinois, Nevada, and, most recently, California. Argonaut Insurance Company, an A-rated insurance company with over $1 billion in surplus capital, backs and issues the Insurent Guaranty in most states while Peleus Insurance Company, an A-rated insurance company with over $1 billion in surplus capital, issues the Insurent Guaranty in California.