Key Elements of CMBS-Compliant Business Interruption Insurance

Coverage Duration

CMBS lenders typically require coverage for at least 12 months of gross income. This period allows for:

1. Property repair or reconstruction
2. Tenant reacquisition or operational restart
3. Return to pre-loss income levels

However, 12 months is often just the starting point. Larger or more complex properties may need longer coverage periods. Factors influencing the appropriate duration include:

• Property size and complexity
• Tenant or operation type
• Local construction market conditions
• Potential for prolonged recovery due to external factors

Extended Period of Indemnity

Many CMBS loan agreements require an extended period of indemnity, typically 30, 60, or 90 days beyond the basic restoration period. This extension recognizes that income may not immediately return to pre-loss levels after repairs are completed. It provides coverage during the ramp-up period when:

• Tenants are returning
• New tenants are being secured
• Operations are scaling back to full capacity

The length of this period often depends on:

• Property type (e.g., retail properties might need more time to regain customer traffic)
• Local market conditions
• The nature of tenants or operations

Types of Covered Perils

Business interruption insurance should align with the property insurance policy's covered perils. Essential types of coverage include protection against:

1. Fire and smoke damage
2. Windstorm and hail
3. Explosion
4. Riot and civil commotion
5. Vandalism
6. Water damage (often excluding flood)

CMBS lenders frequently require additional protection for interruptions due to:

• Utility service interruption
• Civil authority orders preventing property access
• Loss of ingress or egress due to covered perils at nearby properties

Business Income Calculation

Understanding how business income is calculated and covered is essential. Typically, business interruption insurance covers:

1. Net Income: The projected net profit or loss before income taxes
2. Continuing Normal Operating Expenses: Including payroll, taxes, CMBS loan interest payments, and other ongoing expenses

Accurate projections and documentation of the property's income and expenses are vital for ensuring adequate coverage and streamlining potential claims processes.

Additional Considerations for CMBS-Financed Properties

Rental Value Insurance

Properties with tenants often require rental value insurance alongside business interruption coverage. This protects against lost rental income if tenants must vacate due to a covered peril. CMBS lenders typically require this coverage to match the business interruption coverage duration.

Contingent Business Interruption

Some CMBS lenders may require contingent business interruption coverage, which protects against losses from disruptions to key suppliers or customers. For example, a retail property might suffer if a major anchor tenant experiences a disaster at another location, reducing overall customer traffic.

Civil Authority Coverage

This type of coverage addresses losses when government actions prevent property access. CMBS lenders often require this protection, typically for 30 days, to safeguard against scenarios where the property is undamaged but inaccessible due to nearby events.

Leasehold Interest Coverage

For properties where the borrower is a lessee, leasehold interest coverage may be necessary. This protects the financial interest in a lease if the property becomes unusable due to a covered peril.

Maintain Compliance and Maximize Protection

To ensure ongoing compliance with CMBS loan requirements and optimize business interruption coverage, property owners should:

1. Regularly Review and Update Coverage: Adjust protection as property income, expenses, and market conditions change.
2. Maintain Detailed Financial Records: Accurate, up-to-date financial records are essential for setting appropriate coverage limits and expediting claims processes.
3. Understand Policy Exclusions: Be aware of any exclusions and consider additional protection to fill gaps.
4. Develop a Business Continuity Plan: A well-designed plan can minimize downtime and losses, potentially reducing insurance claim impacts.
5. Consider Scenario Analysis: Work with insurance professionals to model various loss scenarios and ensure adequate protection for different potential situations.

The Janover Insurance Group Advantage

Janover Insurance Group's expertise in commercial real estate insurance and CMBS requirements is invaluable for property owners. We can assist you in:

• Structuring a business interruption insurance program that meets or exceeds CMBS loan requirements
• Accurately projecting income and expenses to ensure appropriate coverage limits
• Clarifying policy language and exclusions to minimize protection gaps
• Providing support during the claims process to maximize recovery in the event of a loss

Secure Your Investment's Future

Business interruption insurance is a fundamental component of risk management for CMBS-financed commercial properties. It safeguards your property's income-generating potential—the core of its value as an investment.

By understanding coverage requirements, including appropriate duration, extended indemnity periods, and comprehensive peril protection, you can shield your property against potential disruptions. This approach not only helps maintain compliance with CMBS loan covenants but also provides financial stability in challenging times.

Don't leave your CMBS-financed property's income stream to chance. Contact Janover Insurance Group today to ensure your business interruption coverage provides the robust protection your investment deserves.

In this article:

1. Understand Business Interruption Insurance
2. Key Elements of CMBS-Compliant Business Interruption Insurance
3. Coverage Duration
4. Extended Period of Indemnity
5. Types of Covered Perils
6. Business Income Calculation
7. Additional Considerations for CMBS-Financed Properties
8. Rental Value Insurance
9. Contingent Business Interruption
10. Civil Authority Coverage
11. Leasehold Interest Coverage
12. Maintain Compliance and Maximize Protection
13. The Janover Insurance Group Advantage
14. Secure Your Investment's Future
15. Get Financing

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