A great location has low insurance costs.
It seems that every day there are new ways to insure assets. Once upon a time, you could only insure property. Now, you can insure ideas, your nose, your pet, etc. So, we all know that we need to have insurance. That’s a given. The cost of that insurance is what varies across state, county, municipal and even neighborhood lines.
I won’t attempt to illustrate an actuarial table in this post. I will tell you that the way that insurance prices are calculated is complicated if not convoluted. As consumers of insurance, we all just want the value to be there when we need it, (knock on wood). But what is the net present value of that future unrealized value that may never be captured and how do we quantify it?
In commercial real estate, landlords view insurance costs as a non-controllable, reimbursable expense that tenants will pay for in addition to the negotiated rent. The landlords that are in it for the long-haul will keep their landscaping manicured, their parking lots free from snow and debris, their elevators well-maintained, their roof leak-free and so on and so on. Why? The upkeep of the building enables the landlord to keep operating costs lower and garner a higher value for the asset in the event of a casualty event and subsequent insurance claim. The upkeep probably means the tenant is occupying nicer space than the tenant who is leasing space from the absentee or negligent landlord a block away. A nicer retail environment tends to attract more customers and the tenants tend to do more business. It all makes sense. Right?
It does, except what if the insurance the responsible is paying is relatively high because an insurance claim was filed at the shopping center seven months before the tenant signs the lease. How would the tenant know? Most tenants don’t even know that they can task their broker with doing some due diligence or simply ask the landlord. Even so, landlords generally work hard to lower their non-controllable expenses through communicating with their insurer or county assessor. Landlords can’t prevent crime or weather events from occurring at or near their properties though they may try. In the end, great locations have low insurance costs to the extent that they can for as long as they can. These reduced expenses provide equal benefit to the landlord and the tenant.