Should a business own or lease its commercial space?

From insurance standpoint, there are of numerous issues to consider when contemplating building ownership

Tony Johnson

The age old question: To own or to Lease? There is a lot of commercial development going on in Clark County and surrounding areas. When contemplating whether to own your own commercial space, there is much to be considered. Let’s talk about the pros and cons:

Pros:

Creating an asset and hopefully a reoccurring revenue stream into the future

Owner/occupied, you control the expense of rents and are not subject to landlord increases

You are in control and can make decisions on the building space (within reason)

Cons:

If you have tenants in your building, you are now a property manager (or you hire a great property management firm to help)

Maintenance of the building and the associated cost is now your issue

If your business grows or shrinks it is not as easy as move out of your current space and into a new space

From an insurance standpoint, there are a number of issues to consider when contemplating building ownership.

When building a new commercial building, it is important to have the right insurance in place to protect your investment. These coverages include general liability and well as a builders risk policy to protect your property. The builders risk policy will cover the building (hard costs) and additional reoccurring expenses (soft costs) while the building is being built. This coverage must be written correctly to insure there is not a gap in your coverage should you have a loss prior to getting occupancy of your new building.

Once the building is built or bought, your business can occupy the space. Here is an insurance consideration. Most building owners have created a separate legal entity to own the building. You may be tempted to combine both of your entities on the same policy for ease or to save a bit of money. If you do this, make sure that you have clearly listed both entities on the policy and that your limits of liability are enough to share between both entities, because that is what you are doing. This can be a solid strategy but you must understand the pitfalls of insuring this way.

You may also own a building and have tenants who rent from you. Again, it is important to insure correctly to protect your investment. One concept we see at play is the triple net lease. When this contract calls for the tenant to insure the building, we see many possible risks to this strategy. The tenant does not own the building so may not:

Have the building valued at the right replacement cost limit

Have ordinance and law limits sufficient to consider an aging building or changes in local code

Protect your loss of rents should there be a covered loss or consider additional coverage options like earthquake, floor or earthquake sprinkler leakage

Bottom line is that as a building owner, it is in your best interest to control the insurance for the asset you own. Owning a building is a great way to diversify your income or create an income stream into the future. It is important when considering such an investment that you consult your financial, legal and insurance professionals to get the right advice.

Tony Johnson is a Certified Insurance Councilor (CIC) specializing in risk management for the business community and can be reached at Davidson & Associates Insurance, 360.514.9550 or Tony@Davidsoninsurance.com.

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