How Much Insurance for 9300sf Commercial Building?

Question

Buying a 100 y.o. 3 story commercial building, 9300s.f. plus 2,000s.f. basement.

Not a typo... Paying $20k plus all closing costs for seller and me the buyer. About $10k so $30k total initial investment. Will spend $50-100k in renovations. Completely vacant at the moment, but after rehab I should have 66% leased in short order.

Haven't gotten an insurance quote yet, but the insurance guy (his office is across street from my building and used to insure for the seller) estimates replacement cost at $1.1mil and if I want to insure for cash value he suggests $800k. Sounds expensive in either case, but he's still working on a quote. I'm closing the deal in a couple days so I gotta come to a decision quickly.

What are your recommendations for insurance for me? And liability umbrella? Property in Vt.

Thanks.

Jason Bott · Answer

@Darrell Lee

In the insurance world, the players (insurance companies) for office space are completely different from ones who will write rental property.  You should be able to get some very competitive pricing from both the direct writers like State Farm and the independent agents, so check with both.

Regarding the ACV coverage, you will only be paid the depreciated value of the part of the building that was lost.  So with a 100 year old building, they will be able to argue a large depreciation percentage when paying your claim. Example, $100,000 fire loss, less 80% depreciation = $20,000 claim payment.  That being said, you may only get offers with an ACV option.

The other coverage you may want to put more focus on is call Building Law and Ordnance.  Claim example, you have a fire and all your door widths are not ADA compliant.   The city will require you to rebuild to the current code, but your insurance company will only replace what you lost, which was a noncompliant doorway.  If there is increased cost between the old doorway and the new ADA door, that cost is not covered unless you have the Building Law and Ord. coverage.  These older buildings can have all sorts of uncovered costs to bring them up to code.

Jason Bott · Answer

@Darrell Lee

When a building has a total loss, the settlement payment is not the Replacement Cost, but the appraised value at the time of the loss.  There are variations to the way different insurance companies settle the claim, but they will never pay more than what the property is appraised for when if you are not rebuilding.  If you have a total loss 6 months from now, and will not rebuild, they will most likely pay you the acquisition price plus additional amount invested.

Darrell Lee · Answer

I have a meeting with an ADA inspector to look at the building to give me recommendations. It appears that I will need to have a single tenant for the entire building,  or at the very least one tenant to lease the 1st and second floors otherwise the compliance issues would be too onerous to be practical... i.e. if separate tenants for each floor, a 3rd floor office tenant would need an elevator installed at a min cost of $80k if it was even possible.

A challenge being that he is disabled.

Tim Norris · Answer

I'd echo Jason, and rely upon your current agent.  Doesn't seem to me that those values for 9300 sf are out of line (and may seem light for a reconstruction value)...

BreAnn Stephenson · Answer

Thanks for tagging me Azeez!  As I am not as familiar with commercial properties, I actually would defer to @Tim Norris or @Shawn Woedl for their expertise in this area. Tim is pretty active on here and has a wealth of experience both as an agent and as an investor himself.

Hope that helps!

My best,

BreAnn

Darrell Lee · Answer

Thanks @Jason Bott,

I have ADA compliant restrooms on the ground floor and I am modifying the existing ramp to be up the current ADA specs. I get 25% tax credits for that work as well.

So I assumed if the building burnt down, if I went with the $800k cash value or what ever value I wanted to put it at... that would be the amount paid to me? Here's what he wrote me...

Building is about 9000 square feet. If we were to insure for replacement value, we should probably use a value around $1,080,000. This is probably a lot more than you want to insure it for.

The next step down would be actual cash value which would be around $800,000. Still a pretty high value.

Azeez K. · Answer

Hi @Darrell Lee

Tagging @BreAnn Stephenson she may be able to shed some light on this one.

Rob Beland · Answer

$1M replacement value seems reasonable with a $1M liability policy to go along with it. $2500 deductible.

How Much Insurance for 9300sf Commercial Building?

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