Tenants in Trouble
Business Interruption Insurance Can Help Cover Operating Losses
As a commercial real estate owner, you know how important it is to retain your tenants. But forces of nature can make even the most solvent tenant unable to fulfill the terms of its lease. A natural disaster, such as the landslides that have plagued the Western states or the hurricanes that have ravaged the Eastern and Southern coasts, could inflict massive damage on a company’s facilities. Civil unrest, such as a terrorist attack or violent protests, could also leave a business owner with nothing very quickly. In such cases, business interruption (BI) insurance can help cover your losses.
Here are some examples:
Compensation for Lost Income
BI insurance compensates a company for income lost when it must suspend normal operations because of physical damage to its property or a civil order requiring the business to close. Property insurance covers only physical damage to your property. However, BI insurance is typically an add-on that provides money to pay salaries, benefits and extra expenses incurred (over and above those normally incurred) to mitigate its insured loss.
BI policies generally limit the period of recovery. This “period of restoration” generally runs from the date of suspension of operations to the date of completion of repairs, or the date the property is returned to the same operating condition that existed before the disaster. Policy terms vary greatly. For instance, a policy may prescribe:
- A specific period of recovery;
- A maximum period of coverage or
- A maximum recovery per month.
Also, you can obtain extended coverage for the period between the completion of repairs and your return to normal occupancy. The policy should clearly define “suspension of operations.” Without a clear definition, the insurer might attempt to deny coverage if you don’t suffer a complete shutdown. Moreover, the insurer will cover only losses that are directly attributable to the damage, as opposed to, for example, those partly due to a slow rental market.
Evidence of Losses
BI insurance aims to make commercial property owners “whole” after a disaster has caused a temporary shutdown. Policies compensate for lost rental income and costs incurred — net of operating cost savings. Some policies also reimburse for extra expenses that are incurred because of property damage.
Historic profit and loss statements, tax returns and rent rolls are used to calculate lost profits. However, insurers also will factor in macroeconomic, industry and local market trends that may have lowered rental income — even if the disaster had not occurred. Because indemnity will be based on your property’s financial records, make sure your records are updated and in a safe location.
To make a compensable claim, you must promptly present evidence of lost rental income. You will not be able to recover on properties that were not generating rental income at the time of the damage. Remember, too, that insurers have taken a beating in recent years, and claims examiners are scrutinizing paperwork harder than ever.
Best Move Ever
It is impossible to know when a disaster will strike one or more of your tenants. If your real estate firm does not yet have BI insurance, perhaps it is time to buy a policy. Doing so just might turn out to be the best move you will ever make.
Many commercial property owners hire Ostrow Reisin Berk & Abrams, Ltd. to help support their lost profits calculations and clarify BI provisions. If you have questions about business interruption insurance or policy coverage, contact us at 312.670.7444. Visit ORBA.com to learn more about our Real Estate Group.
Should I Improve Energy Efficiency in My Industrial Properties?
Michael Kovacs, CPA
Energy costs associated with industrial properties — such as warehouse, distribution or storage facilities — can be significant. According to the Building Owners and Managers Association (BOMA), energy accounts for about 15% of operating costs for the industrial property sector, with an average cost of $0.68 per square foot.
Because it is so significant, many wise industrial property owners are taking a new look at energy efficiency measures.
Bundle of Benefits
Improved energy efficiency comes with a bundle of benefits. In addition to the obvious environmental positives, it can slash operating costs, extend the life of building systems and boost asset values by maximizing performance. Certain energy improvements may also produce significant tax breaks such as Section 179(d).
Enhanced energy efficiency can also make an industrial property more attractive to tenants under triple net leases, or investors in properties. Improving lighting, upgrading HVAC systems and similar improvements tend to draw new tenants and encourage existing ones to renew their leases.
According to BOMA, the top five measures for improving industrial property energy efficiency are:
- Upgrading parking lot and exterior lighting to high efficiency fixtures;
- Installing occupancy sensors and lighting controls so that lights go off automatically by zone when no one is in the space using them;
- Reviewing temperature set points and making seasonal adjustments;
- Installing dock shields or dock shelters to reduce outside air infiltration; and
- Using high-efficiency motors for material-handling conveyors and installing controls to run only when needed.
BOMA also recommends the Environmental Protection Agency’s (EPA’s) ENERGY STAR Portfolio Manager®. This interactive management tool can help you manage water and energy consumption, benchmark your energy performance rating against similar properties and earn EPA recognition. An energy performance rating of 50 indicates that a property performs better than 50% of all similar buildings nationwide and buildings with ratings of 75 or more can qualify for the ENERGY STAR label for superior energy performance.
The Portfolio Manager software can also help you set investment priorities. For example, it allows you to evaluate the relative costs associated with a given level of performance, your cumulative investments in upgrades and your annual energy costs. A built-in financial tool makes it easy to benchmark savings across the properties in your portfolio and calculate cost savings for particular projects, too.
Within Your Grasp
When it comes to the value of industrial properties in today’s market, many aspects are beyond your control. Energy performance, however, is firmly within your grasp. Taking steps to improve that performance can produce benefits now and for many years down the road.