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CMBS Loan Secrets
5 min read
by Jeff Hamann

Business Interruption Insurance for CMBS-Financed Properties

Discover the essentials of business interruption insurance for CMBS-financed commercial real estate. Learn coverage requirements and how to safeguard your property's income-generating potential.

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

Business interruption insurance is a cornerstone of risk management for CMBS-financed properties. It protects more than just physical assets—it ensures the continuity of your income stream, which is vital for servicing your CMBS loan and maintaining your investment's value.

Before diving into the intricacies of this type of insurance, consider reaching out to Janover Insurance Group. Our team of experts specializes in CMBS-compliant insurance solutions and can provide tailored guidance for your specific property needs. Contact us today to ensure your business interruption coverage aligns with your CMBS loan requirements and provides comprehensive protection for your investment.

Understand Business Interruption Insurance

CMBS lenders prioritize business interruption coverage because it directly impacts a borrower's ability to make loan payments if disaster strikes. In the CMBS structure, where loans are pooled and securitized, consistent income from each property is essential to maintain the overall performance of the security.

This isn't necessarily more (or less) important than your actual property or building insurance policy, and it may even be included in the language for your building policy, but it's still very important to be aware of this specific type of coverage.

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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          • insurance

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