Blue Dirt
Blue Dirt: Commercial Property Investing delivers expert insights and strategies for building and managing a successful commercial real estate portfolio. Whether you're a seasoned investor or just starting out, this podcast uncovers market trends, financing tips, and key investment principles to help you thrive in the industry.
Blue Dirt
Beyond the Premium: Smart Insurance Strategies for Commercial Properties
Ever wondered why your commercial property insurance premiums skyrocketed—or why insuring a seemingly indestructible metal building can be surprisingly difficult? In this enlightening conversation with insurance expert Mike Price from Hub International, we unravel the mysteries behind one of the most significant expenses in commercial real estate ownership.
The timing couldn't be better for this discussion. After years of what the industry calls a "hard market"—where insurance options were limited and premiums doubled or tripled—we're finally entering a "soft market" phase. Mike explains how this market shift is creating new opportunities for property owners to secure better coverage at more competitive rates. This knowledge alone could save listeners thousands on their next insurance renewal.
We tackle the counterintuitive reality that metal buildings, despite their durability and low maintenance requirements, are considered high-risk properties by many insurance carriers, especially those constructed before 2005. Mike reveals the actuarial reasoning behind this perception and offers practical strategies for improving insurability through documented updates and improvements. For anyone owning or considering investing in industrial properties, this segment provides crucial information that could prevent major insurance headaches.
The conversation also covers essential topics for landlords, including how to properly allocate insurance costs in triple net leases, what coverage to require from tenants, and how timing your insurance procurement during property acquisition can impact your options and rates. Mike shares insider knowledge on presenting properties in the best light to underwriters, potentially unlocking better coverage and pricing.
Whether you're managing a multi-tenant retail center, investing in industrial properties, or considering your first commercial real estate purchase, this episode delivers actionable insights on navigating the complex world of property insurance. Don't miss these strategies that could significantly impact your investment's bottom line and long-term profitability.
Learn more about Blue Commercial Properties on our website.
Welcome to Blue Dirt, the podcast that digs deep into the foundation of commercial real estate investing. Unlike most real estate shows that focus on dealmaking and market trends. Blue Dirt gets into the nuts and bolts of what truly builds long-term value the building itself. We break down how to spot deferred maintenance before it costs you, why a solid preventative maintenance program is a game changer and how triple net leases can maximize your investment returns. We'll also explore the importance of strong landlord-tenant relationships and how they drive stability and growth in your portfolio. Whether you're a seasoned investor or just getting started, blue Dirt gives you the practical knowledge to make smarter, more profitable decisions in commercial real estate. It's time to get your hands dirty and build value from the ground up. Let's dig in.
Michael Carro:Welcome to Blue Dirt, where even idiots can make a killing in commercial real estate. Today. We're joined by Mike Price with Hub Insurance. One of our big triple net factors when we have to monetize a lease is property taxes, property insurance and common area maintenance. So we're going to tackle one of the big three with commercial property insurance today. So let's just get started with an introduction, mike. Tell us a little bit about yourself, your company and how long you've been in the industry.
Mike Price:Yeah, so, like Michael said, mike Price with Hub International. So most of the people around town probably know this is Howes McLeod Insurance. We've been around since about the 1960s. We got acquired by Hub International about four years ago so it's been a great partnership with us. It's kind of the trend that we're going. What it's done is kind of taken small agency that we were and kind of broadened our horizons more markets, more resources and things like that to kind of help us out.
Mike Price:Personally, I've been in the business coming up on five years. Right Everything across the board, but with a focus on commercial property insurance that we're talking about.
Michael Carro:Fantastic, and since Don is new to a camera system, when you have a guest Donnie, you don't look at him because they're going to see the back of your head. You look at me and it's almost like you're looking at him from the viewer standpoint, but when you yeah, just how angles.
Don Redhead:We're kind of learning as we go, folks.
Michael Carro:So we're going to we're going to make this happen anyways.
Don Redhead:Thank you so much.
Michael Carro:I'm a giver and keep keep knocking your mic. That also is very disruptive. I've installed it today to everybody. We had our production manager. Yes, all right, so, uh, yeah, that's been a quite the debacle, okay, so one of our largest expenses, as we mentioned, is property insurance. In the state of florida, we have a lot of perils, including um hurricanes, which we happen to be in the middle of hurricane season. Up to this point it's been very quiet. I know that, uh, if we get a direct hit or multiple direct hits on the state, even if we get nothing in this particular area, the insurance rates for the states rise. Can you walk us through how those rates are calculated, what the global insurance market does and how it affects when a specific state or region is affected by a lot of natural disasters, whether it's hurricanes, fires, floods, all of that, and give us a little bit of history on the rates that have gone up and down over the years, if you can start with that?
Mike Price:Yeah, so kind of first on what the broker side is doing as far as underwriting is basically what they're doing is they're taking a gamble on when they write a policy, especially here in Florida, weighing the risk for adverse Time out.
Michael Carro:I wish I was taking that gamble because they always seem to win. They are the house, so their gamble is not the same as yours and my gamble, but keep going.
Mike Price:Believe it or not, and you're not going to like this. This year is the first year that the market has made money in I think about four or five years. That is due to that low claim activity like you talked about. So the more claim activity we get, it doesn't matter if it's here in Pensacola. If a storm hits Miami, it's going to cause those rates to increase across the board because that carrier in the state has to make up those funds that they lost previously from those claims.
Mike Price:So that's where that rate comes into play. So right now, since we've had a quiet hurricane season the last two years, we are experiencing what's called a soft market. So that means go ahead.
Michael Carro:No, I was going to ask. I've seen soft and hard markets, but I don't know what that means, so walk us through that.
Mike Price:So, since probably about 2019, 2020, right around the time Hurricane Sally hit, we've experienced what's called a hard market that means there's no competition in the marketplace. Nobody wants to write in the state, especially for wind and hail coverage, which most people know is hurricane coverage. So that means that there's less capacity, there's no competition, there's harder underwriting guidelines and that's when we were seeing on your properties when something would go from $5,000 premium to $15,000. There was no other options.
Michael Carro:Right, and part of that is because and I've heard you talk about this over the years is when we have one or two or more large carriers pull out of the state, it still puts a lot of pressure on the existing carriers to write these policies and while you would think they want more business, their exposure of course is greater and they're trying to mitigate that exposure.
Mike Price:Correct. So all of these carriers, no matter who they are, they all have what's called capacity. So they have reinsurers that are in the Bahamas and Switzerland that fund the insurance companies and insure the insurance companies.
Don Redhead:And so they're given what's called a capacity in the state of Florida.
Mike Price:Some of them hit that by March. They can't ride anything and they have to leave the state. But now that they've become profitable we're seeing those less hurricanes. Now there's more players coming into the state.
Michael Carro:Back into the state, correct?
Mike Price:And we've got competition. We can take things, remarket it. We're seeing broader terms. So previously you might have a $9 million building but nobody's going to write that full limit. They're going to give you $5 million for coverage. Right Now we're seeing people get full limits with wind included, seeing a break on premium, all because of the market kind of opening back up and experiencing soft conditions Great Okay.
Don Redhead:So so. So the money being made last year or this year is actually a positive.
Mike Price:Correct.
Don Redhead:Right, yes.
Mike Price:Yes.
Michael Carro:Nobody, then nobody's crying for the insurance companies. I can promise you.
Don Redhead:More of a positive like it's insurance companies enter the market, so we get better company.
Michael Carro:I hear him and it's almost sounds like the fuzzy math from the government we, we didn't make money, but yet they still. Everybody has plenty of buildings and assets and they park billions of dollars into it. So so nobody's going to cry for the insurance companies, I can promise you. Ok, so the insurance companies when you get a loan on a property, when we get loans on commercial properties, we are required by our carrier I'm sorry, by our lender to have insurance is something that a lot of times, when we are getting ready to close on a property for one of our clients or even for ourselves, sometimes the insurance is the last minute to get written and sometimes in the past it's been a little bit complex, but you need to.
Michael Carro:When you get a property under contract, one of the first calls we make is to our insurance broker, which in this case is Mike Price. So we let them know, you know, 90 days out from closing, hey, we have this property under contract, start working on it. But they have a few limitations that they can't write policies within a period of time. Can you walk us through that scenario?
Mike Price:Yeah, so it kind of hit on that last point. Most brokers aren't going to quote anything outside of 45 days from closing especially right now during hurricane season.
Mike Price:They're not going to guarantee you a quote 90 days out and the storm could come through, wipe everything away. So that's pretty much standard practice 30 to 45 days to get a quote. So what my job is as the broker is to paint the best picture for the account and the property. So that's collecting as much information as possible that we can then take that to all the underwriters. Paint the best picture you know, not just of the building but of the buyer too, of your history and experience, and put everything into a package and submit that to the underwriters, because right now we're hearing, these underwriters get 50 or 60 submissions a week on their desk and most of them are just blank.
Don Redhead:hey, quote this building.
Mike Price:So the more details that a property owner can provide with us, that we can provide to them, the quicker it's going to shoot up their desk and get a favorable quote.
Don Redhead:Now, when you're saying, provide data on the buyer, that self I'm sure it's somewhat fluid, but what percentage of the underwriting would you say is building related versus what is buyer related? I mean, are we talking? What kind of how would you think it's going to be? It's going to be the large large majority on that building.
Michael Carro:Now they do take into consideration, especially with our underwriters we have a good relationship with.
Mike Price:We can say hey, this is Michael Caro and Don Redhead. They manage a lot of properties around town. They're one of your groups, things like that. What they do is may not affect rate, but it affects someone else to come and look at it instead of just passing through the desk with the rest of their solutions but, most of it's built around, so it's really more of a prioritization versus a maybe an advantage on pricing or things like that correct more.
Mike Price:More of the, the rate breaks and the help is going to come from things like updates to the building, who's occupying it, distance to the coast, roof age, the construction type. All of those things are what it's measured and put in when they spit out. Basically it's called a rate for the people at home. So rate is all of those things that they take into account in the writing. They take that rate and they multiply that by the TIV.
Mike Price:So TIV is total insurable value whether that's the building value, whether that's if you're buying it and using it yourself. You have contents coverage if you have loss of rents. All of that is what's called TIV TIV multiplied by the rate, and that's how they get your premium so when we buy a property, uh, we just closed down a property.
Michael Carro:uh, today's Friday, we closed on another property Wednesday, wasn't it?
Don Redhead:Yeah, yeah, yeah yeah.
Michael Carro:So so this was a formerly a lounge. Um, it has a full restaurant. I say full, it has a full kitchen that can be a restaurant, and it was a full bar area, freestanding building, and so we like to talk about actual examples, and this is something I want to beat you up on offline, but we'll get to that in a minute. So we presented him with the property 90 days ago. The quotes varied fairly significantly. You want to talk about at least the variations, at least on this particular property yeah, so this one that michael speaking of.
Mike Price:Like I said, it was a restaurant. Um closed this week so we took that um out to market. I got, I believe, four quotes on it originally. Uh, they range anywhere from they, if I can talk numbers anywhere from 13,000 to somewhere maybe two or three times that.
Michael Carro:It was insane.
Don Redhead:Yeah, we're open book, you can go Okay.
Michael Carro:No, we don't mind talking. This is what we actually like to do, because we're hoping the people who are watching and or listening you know we don't. Our whole thing is we don't want to talk about theory, we want to talk about actual situation, because this is what you guys are going to ultimately go through yourselves and we're hoping that you can learn from the situations from us and then you can kind of grind your your own insurance broker for the things that they do.
Mike Price:Just grind them not not so good. So yeah, so in that particular case, we got a wide variety of quotes um, and it's like we said, it's always ends up being what feels like a last minute thing, we're always shopping it for you and some of these people come in five days out, some 10 days out, but we presented all those options.
Michael Carro:So the options, just for your edification, is, it came in from early on. The budget we used was seventy eight hundred dollars, $7,800 for the year. But this is a bit further out where we didn't probably have actual quotes. We probably had projections, because they can't get actual quotes, like you mentioned, 45 days out. But I'm here trying to find a tenant and I'm having to give them a predictive pass-through expense. So the early number we used was $7,800 for the insurance and then, when it came back, the range was $13,000 to like $30,000, which was so. So help us understand why there was $30,000. I didn't know we had I know. Well, I don't need to show you that because that's irrelevant. It is irrelevant.
Mike Price:And I think it was higher than 30,000,.
Don Redhead:I think it was 39,000.
Mike Price:So, and all of those because each carrier depending on type of risk. So some carriers want, you know, a certain construction type a joist and m screen a frame building. Some have a better rate for non-combustible buildings, which is what this one was that we were working with, which is basically a metal building.
Don Redhead:It has some other stuff on the facade, but essentially it's just boards and metal buildings. Right.
Mike Price:So that carrier in particular. They had the best rate on a metal building. Now, while we're talking about that, that is the hardest risk right now to write.
Don Redhead:Really Is metal buildings. Why is that? Because I keep seeing that, but that's illogical.
Michael Carro:They still have great wind ratings. Their roofs last forever, practically as long as you maintain them. I'm confused, tell us.
Don Redhead:Tell us.
Mike Price:Educate us. My understanding on the metal buildings why they don't want to write. My understanding on the metal buildings, why they don't want to write, is that there is a higher total probable loss, so there is a higher risk that if a certain company writes a bunch of metal buildings, in the 3-2-5-0-7 area code that if a storm comes through, all of those are gone.
Michael Carro:There's no partial losses like it would be on like a masonry building. Isn't this front of the building masonry?
Don Redhead:it's like a stucco, ish, I don't know what is it?
Michael Carro:a metal building that they just put some stucco over the front everybody does it?
Don Redhead:yeah, how do they do that? Because it's like even the new buildings that you think. Like you know, we have a couple medical centers and from the road they look like a brand new stucco building, but they're a metal building, they're just a pole barn not, not a pole barn. Whatever a pole barn is very, is definitely different than what we're talking about, but either way, yeah, it's like they're so simple, but is it so they're saying that if there is a loss, it's just such a great loss versus a partial loss, that's?
Mike Price:what you're saying? Yeah, yeah, they're mine. They model it that if the worst case scenario Category 5 hurricane comes through Pensacola, they think that all those metal buildings?
Don Redhead:are just gone.
Mike Price:Specifically that are older than 2005. That's a lot of their cutoffs, there's a high probability that those are gone, so that's where those rates.
Don Redhead:Where did they base that off History? So that's where those rates.
Michael Carro:Where did they base that off History? Did that happen?
Don Redhead:somewhere. No, it's an actuary science that is made up. You are, you are. I would like to see this. I will let Mike answer this question Fine, mike, I don't come up with the rates. Show me the example of where that happened.
Mike Price:I don't have that.
Don Redhead:Every metal building in that whole territory was gone. Did that happen somewhere?
Mike Price:Might not have happened here. I don't see. I said somewhere. I can see him shaking his head. So they have this history, like Michael said, and these modelings all across the state.
Don Redhead:Okay, I could make up history too, then it wouldn't be history.
Michael Carro:I just want to see the example. We would call that a lie.
Don Redhead:I know where they got it from.
Michael Carro:as far as they use that, yes, I'm just saying, saying please show me the event that happened, that this can I can I just point this out. This is what I have to deal with every day. This is the problem in my life. This is why I go to bed sometimes with heart palpitations, because sometimes I finish my day and start my day with donnie and he goes into this death loop, into nowhere. I just want to see the photo.
Don Redhead:that's all I want to see the photo. That's all I want to know. Just tell me the story that this happened Were you?
Michael Carro:here during Hurricane Ivan in 04? A lot of metal buildings, were you? Here is what I asked. I wasn't Okay. There's your proof, okay. I was here Were you here. I was in eighth grade, okay Well, he was a baby, but there's your proof. I went through, I've been here and I can tell you what. There wasn't anything standing okay, in certain areas.
Don Redhead:all right, fair enough, but anyways I'll look up what you call this storm ivan okay, it's a september of 04.
Michael Carro:It was. It was massive, it was our best hurricane. It was our best hurricane ever.
Michael Carro:That sounds like a positive event I well, you know I actually this is so bad to say I shouldn't say this I don't mind hurricanes because it does get rid of old, fragile structures and and it like scenic highway. As an example, all those trees were knocked down and that you can't see the water during normal, but after hurricane ivan that scenic road became scenic again, right, and then it really brings communities together. There is a positive side to a terrible event. It brings people together, that you work with your neighbors for the positive of your community. Um, it's, it's just you lock arms and the community becomes so much stronger. So there is a positive. There's a lot of negative, don't get me wrong, but the positive is, I think, the community comes together in a better, stronger way.
Don Redhead:So that's nice, that's beautiful.
Michael Carro:I'm a giver.
Don Redhead:Can we do that, like, can we post that somewhere? Okay, let's do that. Get a bumper sticker. So all right, I'm sorry, a bumper sticker.
Mike Price:So all right, I'm sorry, we're all going back to the hard and the soft market, and one thing I did want to point out, because I know a lot of people that invest in the properties and look at this that is the one problem child that we're seeing that's not getting the benefits of the soft market for these metal buildings.
Mike Price:So it it is what it is. It's the way that they model. We try our best to send out to as many markets as possible, um, those markets being the wholesalers that have another umbrella of companies under them, but that metal buildings are the ones that are better.
Don Redhead:Is there a certain age on the metal buildings?
Michael Carro:I think it did touch that.
Don Redhead:So anything older than 05 is where the real issue is.
Michael Carro:And that's kind of interesting because one of the asset classes that I really really like are industrial properties, metal buildings. I like them from a new ownership standpoint, other than what we're learning today on hurricane or not hurricane, but insurance. The asset class itself is so simple to own and manage because they have so little that goes wrong with them. So this is actually enlightening to me because I would have never thought that metal buildings would be the hardest to insure.
Mike Price:Now metal buildings that are the hardest to ensure now metal buildings that are older than 05. But if you update them and we can see proof of the updates um roof obviously being the biggest one. You can update the roof, you can show that uh, electrical has been updated a lot of times they don't have a ton of electrical unless they're, you know, like a restaurant right with your large warehouse. You have a ton of it. But if you can update that, roof.
Don Redhead:Then it opens up those markets, like we had some people that would have been interested were interested, but they wanted to see that roof place now, what was?
Michael Carro:this is what's frustrating to me. A metal building has a metal roof. Um, interesting, and and these metal roofs they are really they don't go bad, unless they have rust that goes through. The screw holes or the rubber gaskets on the screws that hold the metal panels down begin to deteriorate, and then what we tend to do is we'll go back in and replace all those screws. So if the metal is good and the screws are good and the gaskets on the screws are good, what is the problem if it's an older roof?
Mike Price:In their mind, it's still those original panels on it that could still be damaged and I see where you're coming from, and a lot of people these days will do what's called a coating on it too.
Michael Carro:So if you get a license, If we put a coating on it, then we can get a reduction.
Mike Price:I can't promise you a right now well, no, you already screwed me this year. I want to go back year one I'm already if you can do, get it a permitted, because that's what they want to see. When these companies come out and do an inspection, they look for the permits on there that shows work was done to the roof.
Michael Carro:Okay, that's fine, I'm going to accept it for this minute.
Don Redhead:Now we're getting ready to do a fastener replacement, Literally. This is out in Crestview. I don't think they're pulling a permit for it.
Michael Carro:I mean, it's a local. Well, you don't need to pull a permit to replace the fasteners now but is that not something that should be weighted?
Mike Price:That's something that we can present. See, these are things like I'm talking about presenting, you know, painting the best picture, and if you can show that work with like a paid in full receipt, with like a work order before and after pictures, those are things that we present.
Don Redhead:All right, Fair enough, Good to know I just he wasn't. He didn't have to pull a permit for it. I mean, it's a big commercial roofing group and I just wasn't sure. He just said permit.
Michael Carro:So as long as we can paint that. So let's go back to this restaurant lounge that we're talking about. So we just closed that it two days ago. It has Don. It has what? Three electrical panels or two.
Don Redhead:I think it has three panels and then one of them the service is outside.
Michael Carro:The service is outside, but one of them we had completely replaced. Brand new Siemens, brand new Siemens. So the electrical has been completely updated, not every outlet, but certainly the system has been updated. Oh, yeah, yeah. Yeah, the mechanical All relatively new.
Don Redhead:Right Yep. So mechanical, electrical, Probably within five years maybe. Plumbing was updated because they kind of redid the building about five years ago and we have camera'd of it. We camera'd the lines when we bought it.
Michael Carro:Yeah, and again, I don't know what you guys focus on, but you know because so, but you know cause, um, so you know. So this is a normal process that we go through. Mepr, mechanical, electrical plumbing and roof are the things that we focus on whenever we buy a commercial property, and those tend to be the same things you like to focus on from an insurance standpoint.
Mike Price:Correct. The big thing that we ask for you guys is your bill, which has an easy one nothing to control their roof. Hvac, plumbing, electrical All of those factors come into it.
Michael Carro:OK. So a couple of years ago, the insurance industry, when they were trying to Screw people more than normal, they had this issue with roofs age and relatively newer roofs Age and relatively newer roofs. They were still requiring a lot of people to replace them or they wouldn't get insurance. So walk us through that, because it's not so hard today as it was just a couple of years ago. Walk us through what was going through the insurance industry at that time and why it's different today.
Mike Price:So that was like we talked about a few times. That was the hard market, and part of that is stricter underwriting guidelines. Okay, so they had to be they only had so much capacity. They had the ability they had the upper hand at this point to put in those strict guidelines like making your roof replaced after 10 years, which is unreasonable. Most of them have a 30 year warranty Right, but they were in that position.
Michael Carro:And people weren't able to close on the property with having insurance in place, which, of course, is a lender requirement. So, unless you're paying cash, you either had to budget for replacing that roof or what were their other options.
Mike Price:So there's other options. One quick one this is kind of a new one that we've experienced too is you can do what's called an actual cash value, called ACV roof, so it changes the valuation on your roof. Now, if you're going out and getting a loan on a building, it's something you want to talk to your lender.
Michael Carro:Hold on Tell us what ACV means in a literal sense.
Mike Price:So ACV is actual cash value. So most of your properties that you insure are going to be. You'll see a little one that says valuation, say RC, that's replacement costs. So that means that if a storm, a fire comes through, burns your place to the ground, they're going to pay you what it costs to replace that building ACV is like a depreciated value.
Michael Carro:So if you had a using easy math, you have a a hundred thousand dollar roof and it has a 20-year lifespan, and so a hundred thousand divided by 20 is roughly five thousand a year. So if it's a 10 year old roof, the acv would be valued at a hundred thousand dollars. They would.
Mike Price:They would pay you and they have their own calculations on the depreciation right but if that roof gets fully damaged, they're not going to pay you what it costs to replace in 2025. They're going to pay you what it's worth.
Michael Carro:Okay, so it's coverage?
Mike Price:Yeah, it's not as good coverage.
Don Redhead:Right.
Mike Price:There are some premium help with it. It is cheaper obviously.
Michael Carro:Sometimes it's not enough to. I don't suggest it right, save money. But if I'd like to, I'd like you to at least give me an option.
Don Redhead:Well, that's we did just say no now. Now, from a lender standpoint though they they do, they have to sign off on that page most of the time now you have to hide it from your lender don't send it to them.
Mike Price:Oh, but you know what I mean it's like. Just keep this between us Lender, most lenders.
Don Redhead:Don't send it to him.
Michael Carro:But you know what I mean.
Don Redhead:It's like just keep this between us.
Mike Price:We always recommend to get a lender approval on it, because we don't want you to close on it. And then, next thing you know, they canceled the loan. We've got to rewrite coverage.
Michael Carro:Well, but let me ask you a question. Coverage, well, but let me ask you a question, and that goes back to my earlier conversation with before we get to closing, you always connect with our lender, provide them with the coverage, and I presume that's the open book that we have with them. So before we even close on the property, it's required at closing that we have the insurance in place, and then the insurance company somehow names the lender as additional insured, I presume.
Mike Price:Usually it's called a mortgagee and loss payable. That means they're entitled to whatever money you're owed in the event of a claim. So they're tied to the policy. That's a simple thing. You guys are great about getting us connected with those people. Sometimes we don't hear about it until after closing, but either way, it's a simple process. We provide them the necessary documents. They keep it on file. Then, every year or two, they reach out to us.
Michael Carro:And but. But during that exchange of information you're sharing the policy where they're reviewing to make sure it's acceptable, correct, okay.
Mike Price:So they're seeing it on there.
Michael Carro:Yes. So you know, obviously I'd say things tongue in cheek, but the reality of it is is our insurance company and our lenders all work together to make sure we have the coverage that's acceptable. So if there was an ACV opportunity, they would know about it before we, before we actually bought the coverage.
Mike Price:So that's part of those documents that are provided to. It's all listed on.
Don Redhead:Yeah, and one thing on that it's it's it's more of just broad topic. If you can tie the people that actually know how to communicate these things because they talk the same language, just connect them. And so a lot of times people want to be in the middle of these types of things and they're just, they're reeling, confusing information back and forth and ultimately just wasting a lot of time.
Michael Carro:It's not just insurance, but it's with a lot of stuff like that. So we're landlords on a lot of properties and so we carry certain amounts of coverage and then. But we also have tenants, right, and in our leases with our tenants, we require them to carry coverage. Why don't you discuss the types of insurance that a tenant should have and ie, if you're an investor, what you should have in your leases that your tenants should be required to carry?
Mike Price:Yeah, so the first and foremost, the most important thing is general liability. So all of your tenants, no matter what the risk is, no matter who it is, where it is, they need to carry what's called a general liability policy and the limits on are 2 million. 1 million.
Don Redhead:That's the standard state limits.
Mike Price:That's simple enough and most insurance agents be well versed enough to do that. That's what you quote. So that covers the tenant for anything that happens on site that might be. They might be liable for it, and they always have to name the building owner. So carol lc, whoever it is, name them additional insured so you're protected as well in that coverage limits if anything happens. So that is the main thing the general liability, and then this you can always require them to to carry property insurance on their own contents and any improvements they make within the building too.
Mike Price:So that's just similar to a basic property coverage now I have not found it.
Michael Carro:I don't know you can make them carry any type of coverage but outside of the general liability I don't know that we require them to carry contents coverage. We want them to understand that our property coverage for the perils on the building will not cover their personal effects. But I like people to understand it's up to them whether or not they want it. Also, when I get a tenant that wants to up not update, but change the language, you know when we send them a lease, you know there's a little bit of horse trading as to sometimes they'll want changes. And I just had something at one of our properties and they wanted to change all the lease language and I said our insurance language within the lease. I said, listen, you can do whatever you want, but you're going to run it through.
Michael Carro:Mike Price, you always want the section of the insurance that somebody may want to change because he's already reviewed it for our lease. You want to send that insurance section, either send it to your insurance carrier to approve or have them give you language to insert into your lease. But you shouldn't do it yourself. And so if anybody, if a tenant, ever wants to change that language, just connect them with your insurance carrier, and because I like them to connect anyways, so they're not accidentally writing duplicate coverage for for their property and um. So I just find it easier to do it that way. But I will not redline changes in an insurance section unless, uh, my insurance provider approves it, right?
Mike Price:Yeah, so there's. We see a lot of things in leases people share with us, like plate glass coverage. They want to protect the windows all that's covered under the property insurance. People require workman's comp auto. All of that is really up to the tenant. The main thing that we always, always require is just that general liability.
Michael Carro:Don, from a property management standpoint, we know that triple net one of the ends is property insurance. Walk our listeners through how that is calculated from a triple net and how you provide that on your invoices.
Don Redhead:So typically what we're going to do is get the total value provided by Mike. What's the entire amount of insurance carried by that property. General liability is part of it. So there is a property, you know, general liability, specific, not just the tenant. We have the property insurance and then sometimes there's other layers, like business loss, income right, it's something that we'll have in there and what we'll do is put that package together total amount of insurance and essentially just divide it by the square footage of the property. And then what we're going to do is allocate that on the pro rata share of the space that they're going to occupy. So if they're a 10,000 square foot building and they occupy 1,000 square foot in that building, they're going to pay 10% of the annual property tax.
Don Redhead:And typically what we're going to do some owners want it done a specific way, a specific way the best way for, I would say, new owners to do it is going to be essentially, add that line on the invoice, collect that money and actually set it aside so that when the insurance bill comes due next year you can pay it in full and you don't have to strike that big check. Typically the way we run it is, we will actually just leave it in there. We account for it differently. But make sure your property taxes, your property insurance, these big bills that you're squirreling away a little bit of money, don't actually issue those as dividends to yourself, because then you're all of a sudden going to go at the end of the year. Oh my gosh, I got to write this big check Right. So we're always trying to account for that when we do it.
Michael Carro:But typically they're just going to pay a pro-rata share. Mike, if you have a 10-tenant building and let's say, one of those tenants somehow is a much higher risk which affects the overall premium. So in Don's example, you know, everybody has kind of an even type of risk. But there's probably and we don't I don't think we have what I'm trying to describe here in any of our buildings right now that I'm aware of. But if we have a 10 tenant building and you have one tenant that has a much higher risk from an insurance standpoint, is there a way to bifurcate that premium so that that one tenant pays a slightly different share based on their higher risk?
Mike Price:To my knowledge, we haven't had to deal with that. You know it sounds like what you're saying. If you've got, you know, nine office spaces and you've got a guy that's doing welding or something, something kind of crazy, we could and this wouldn't be exact, but just kind of the way I'm thinking right now you would run it as the cost for a 10-office place and then what it is, you can find that difference, but that's not something we come across too often, but it's something we can probably find a way to do Well, cause I did ask you a question a while back that you still couldn't answer, so I'm going to, I'm going to ask it to you in front of everybody.
Michael Carro:So you have a, you have a building. You have a two story building. You have the first story that has all tenants, and the second story has nothing. It's just a vacant space.
Mike Price:You know, you certainly wouldn't divide that equally no, and you'd want to take that square footage and we just want to know what square footage is associated with what right on this, I know which one you're talking about. It would that one that would be pretty much split pretty evenly. On that, we would seem to know who's got the square footage and we would divide that by the premium and the tiv and then come up with kind of that, you know who's allocated to what amount.
Don Redhead:We've done that in the past too. Yeah, no, I want to be even.
Mike Price:I want to be even or because there's on this one in particular, there's I think I know what's property time there's, it's all.
Don Redhead:All that. There's nothing causing in particular. I think I know which property you're talking about.
Mike Price:It's all that. There's nothing causing a rate, you know increase or decrease from the tenants. You know what I'm saying.
Don Redhead:It's really, but there's no. Well, that's not true. That's not true. Infrastructure right.
Mike Price:But who owns the second floor? Who's using it?
Michael Carro:Nobody. It's a vacant space.
Mike Price:Okay space.
Michael Carro:Okay, so, but but so I I disagree, because the first floor in in this example has invitees. Right, they have occupation, they have they, they are running businesses, they have people coming in and out, so they're certainly their general liability risk is much higher, but the property should be less right the, the um, because isn't bacon more expensive?
Mike Price:bacon is more expensive. Um yes, from the liability side.
Don Redhead:But if there's no nothing in this space, the second floor Well, so.
Michael Carro:But then I'm thinking that if I'm occupying a space, if I'm having A party oh, parties, you know well then I have a higher risk of people setting my building on fire, of people setting my building on fire. I mean, I'm being exaggerative, but still I would think that the cost of potential liability is much higher. Correct, Okay.
Mike Price:So on the liability side when you get a liability quote there's different exposures. So it'll say you know restaurant exposure, things like that, that one's easier to break out. The property coverage everything in one building, like it's what we're talking about, is one rate, one TIV. So it's harder to break out. No, I understand.
Michael Carro:But in my world I have to value spaces and if I have four spaces completely built out with restrooms, with electrical, with mechanical, with everything that has a certain value, and if I have a empty space with no infrastructure, like don mentioned, that's the part I'm getting hung up, you know, I mean I mean that has no hvac, that's being insured, has no panels, has no yeah, and I think that'd be something more that we just had to sit down and come up because it's more like a storage space, essentially exactly you know.
Mike Price:So again, I'm just but you see, this is what happens all day, this is, this is there's no, I'm just saying that there's no, it's no.
Michael Carro:Most of the things are not perfect boxes and the good thing is we have a lot of properties that are just single tenants easy, easy, easy right. Or we have a lot of properties that you know might have 10 different retail spaces, but they're all kind of the same. We have office buildings that the whole thing is an office building, no big deal. But those are the easy ones, and you know, mike does that all day long. But we have to challenge for these unique situations, because they do come up and so we have to think outside the box because they won't, you know.
Don Redhead:That's what we do. That's all we do. All right, wrap it up, we got it. We got it. Where do we got to go? We just got to transition, oh our producer is telling us he's saying wrap it up. I said you three minutes. What? 12 minutes ago?
Michael Carro:I told you I didn't hear anything about three minutes I didn't say it.
Don Redhead:I wrote it and shoved it to you, but you're looking up at the sky.
Michael Carro:Well, hey, okay, that wraps up another. What podcast is this? That wraps up another blue commercial real estate? No, blue dirt, it says it right there Blue dirt. That wraps up another blue dirt commercial real estate investing podcast, where even idiots can make killing in commercial real estate. If you like this episode, you probably didn't, but if you do like it, please like save or what's the other one? Uh, you're an idiot. Share, uh, uh, subscribe. That's the one. Hit that, subscribe, punch it. What did they say? Pound it, smash it smash.
Don Redhead:Do anything with that subscribe button. That's getting out of control. Thanks, Thanks guys.
Michael Carro:That's a wrap for this episode of Blue Dirt. We're here to help you build smarter, invest wiser and create long-term value in commercial real estate, one solid foundation at a time. If you found today's insights useful, be sure to subscribe so you never miss an episode, and if you know somebody who could benefit from these discussions, share blue dirt with them. Got questions or topics you'd like us to cover? Reach out. We'd love to hear from you. Until next time, keep digging deep, stay sharp and remember real value is built from the ground up. See you on the next episode.
