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Captive Case Study – Real Estate

The Situation

Our client is a real estate investment and property management company serving self-managed private equity funds and investment partners.  Following a decade of no or minimal revenue growth, the multifamily industry appears to be in a healthy recovery phase.

The Challenges

While they recover, the company is still impacted by capitalization rates that are being driven to historically low levels resulting from unsustainably low interest rates.The commercial insurance market is seeing price increases and tightening capacity for perils such as wind damage. Additionally, multifamily loan documents introduced in 2011 by Fannie Mae materially expand the risk of recourse exposure to borrowers and loan guarantors. The company is also exposed to additional personal liability risks, which have increased substantially.

One Solution

The client engaged Intuitive Captive Solutions (Intuitive) to prepare a feasibility study to review their organizational structure, insurance program, loan documents, and personal guarantees. The study resulted in the identification and quantification of several new personal liability risks and adjustments to the existing commercial insurance program that offset the tightening insurance market conditions. Upon review of the study, they instructed Intuitive to form a new 831(b) captive – a domestic private insurance company – to insure selected property, casualty, and personal liability risks.

The captive – controlled by the owners of the real estate investment company – issued a supplemental commercial insurance policy to the company in exchange for a fully tax deductible annual premium of $1,190,000. Though this is in addition to the company’s annual third-party insurance premium expense, it accomplished several goals:

  • Created a profit center to cover previously unfunded self-insured risk.
  • Gave the owners peace of mind by broadening their insurance coverage.
  • Offset premium dollars going to third-party insurers.
  • Reduced current income tax obligations and created potential additional wealth for the owners and their families.

The Benefits

Now, the company has a new business with additional net profit budgeted to exceed $3 million over six years. Forming the captive created a reduction in current income taxes to the owners of nearly $475,000 and there is an anticipated distribution of the captive’s profits to its owners at more favorable tax rates. The company may also be a recipient of reinsurance payments on losses that otherwise would have been totally self-insured.

Find out more about how we can help you restructure your risk in this changing market. Contact us.