Sticker shock Featured

8:00pm EDT July 30, 2006
Last year, a record 28 named storms in the U.S. included 15 hurricanes. The insurance industry covered $40.6 billion in losses from Hurricane Katrina alone, while total catastrophe losses were $61.2 billion.

Underwriters that insure commercial properties in Florida and other high-risk areas have reacted this year by drastically increasing their rates. Property owners must either pay more for insurance every year to insure a less desirable building or pay up front (dig deeper footers, add concrete to walls, use thicker metal on roofs, etc.) to build a more insurable building.

According to local newspaper reports, some businesses on Florida’s beaches can’t be sold because potential buyers can’t afford insurance or even secure wind coverage. Businesses that have wind coverage and whose deductibles have ranged from 2 percent to 5 percent of the building’s value can expect to see deductibles up to 10 percent of the building’s value, the media says. Why? Because insurance carriers are increasingly reluctant to write policies and will continue to charge higher prices in exchange for assuming higher risks.

“Insurance rates are skyrocketing,” says Howard Rosenthal, principal and senior vice president at Colliers Arnold. “In some cases, they’re up 70 percent.”

Smart Business talked with Rosenthal about how potential buyers — including investment buyers — can cope with insurance and other concerns.

With insurance rates so high, what should potential real estate buyers look for?
It really depends on the property. People who are looking to purchase commercial properties initially don’t consider insurance premiums. It’s usually not until they get into the due diligence process that they start thinking about insurance. And that’s when some of them are shocked.

If you’re interested in buying a property, insurance rates should be considered up front — one of the top things in due diligence. If you don’t pay close attention and instead wait until two weeks before you close, you may find that you won’t be closing.

Is lower-risk real estate available?
Water properties are most valuable and higher risk. Properties that are away from the water are more easily insured or rates are lower.

There isn’t a lot of oceanfront property left. Condos are going up in place of the old motels.

Typically, real estate is all about the location. Waterfront is prime property in terms of condos, but commercial property is typically away from the water at a main corner or on a main thoroughfare.

Property is moving very well nowadays. Retail is moving very strongly because people are moving down here, and offices are moving as well. There’s a tremendous amount of opportunity to rehab and/or redevelop retail sites, because old regional malls built by DeBartolo are being converted to big-box centers and multi-use projects.

What actions are buyers taking to offset insurance premiums?
Florida insurance has been a little bit higher over the last couple of years but particularly this year. The situation in New Orleans doesn’t help. Nobody has control of insurance rates anymore. The government is trying, but they’re not doing it. The National Flood Insurance Program is geared more toward homeowners rather than commercial properties.

In cases where the buyer will be leasing the property, high insurance rates could be offset by expenses being passed through to the tenant. Some leases are called triple-net leases, which means that the tenant pays for expenses of the property. That would include all operating expenses including utilities, insurance and taxes.

The only other way to cope with increasing insurance premiums is try to work toward reducing the property’s overall operating expenses.

What about insurance pools?
Florida officials are looking into reviving a property insurance pool that would cover malls, office buildings and other commercial property in South Florida. _The size and strength of a pool allows it to negotiate the most competitive deals from re-insurers. But when you go to an insurance pool, you stand the chance of not getting the amount of coverage that the bank lender requires.

Do you make insurance recommendations?
If our client has not already arranged the insurance through a policy they have on other properties, we will help them arrange for coverage. And we’ve been fortunate enough to get it for most of the properties that we’ve dealt with. The larger the portfolio, the easier it is to get better rates from insurance carriers. Because of our portfolio of properties and the relationships we’ve built with insurance carriers and brokers, we’re able to leverage our influence.

HOWARD ROSENTHAL is senior vice president of Colliers Arnold, based in its Clearwater office. Reach him at (727) 442-7184 or