A Guide to Commercial Real Estate Insurance for Your Business

In most major markets, commercial real estate leases in heavily-trafficked neighborhoods can explode a company’s monthly overhead. Besides the cost of the space itself, you may be on the hook for utilities, shared common area costs, security, supplies, and staff. But one cost that’s easily overlooked may be the most important: commercial property insurance.

For those in manufacturing, retail, and non-profits, this is a critical aspect in protecting your business from unforeseen accidents and incidents. While each industry (and the accompanying assets associated with each business) demand different costs for commercial property insurance, it’s important not to overlook this facet of commercial real estate leases. And as with auto or home insurance, it doesn’t hurt to shop around before securing a policy. 

Before you start your search for a suitable commercial property insurance policy, you should inform yourself with the ins and outs to ensure you know what to expect from your specific business requirements and to protect your company from undue burden.

Explaining the Basics of Commercial Property Insurance 

As with residential insurance, commercial property insurance covers a wide variety of danger and accidents, but it’s not a blanket protection. Most commercial property insurance policies cover common accidents, like theft, water damage, natural disasters, vandalism, and fires, but most importantly, these policies insure your property and resources within the building itself. In addition, they protect property your customers and employees bring into the store, signage, and branding items located within. However, it doesn’t protect you against lawsuits, so business owners should invest in general liability insurance to protect yourself against expensive legal fees related to your business. 

Who Should Secure Commercial Property Insurance?

Any business with a physical location should invest in commercial property insurance to protect the building itself, but even those who own their business and work from a home office should purchase commercial property insurance as well. 

Whether you have a commercial real estate lease or own the building outright (or are paying a mortgage), you’ll need commercial property insurance to cover the building. If you’re renting the property, the owner will transfer liability to you based on the square footage included in the lease. Before you can even sign a commercial real estate lease, you need to provide proof of commercial property insurance showing coverage amounts and the scope of the policy. 

Breaking Down Costs and Benefits

Depending on the value of your assets, including specialized equipment, computer systems, furniture, etc., your annual rate for commercial property insurance will differ. However, small businesses, such as coffee shops, boutique clothing stores, and bookstores, can expect to pay between $500-1000 per year. These rates are based on the construction materials of the building, distance to a local fire department station, and the nature of the business. Also, like residential property insurance, the rates will differ based on the value of the property and its contents- the larger your business, square footage, and the more valuable your assets, the higher your deductible will be.

To protect against accidental fires, water damage, flooding, and other natural disasters as well as man-made damages like vandalism and theft, commercial property insurance is an essential – and sometimes mandatory, as stated above – aspect of owning and operating a business of any size or scope. 

What’s Lessors Risk Insurance – and Why Does it Matter?

Lessors risk insurance is only applicable for building owners who maintain a minority of the property’s square footage and sublease the remaining area to other occupants. While building owners require commercial property insurance from tenants, lessors risk policies are an essential component of owning and operating a commercial building. These policies are less expensive than commercial property insurance, but still insure the property and its assets. 

What to Keep in Mind When Shopping for Commercial Property Insurance

As previously mentioned, commercial property insurance only covers certain aspects in the insurance world and shouldn’t be used as a blanket protection. If you’re about to start a business or open your first physical location, keep the following additional policies in mind to maximize your protection going forward:

Property Insurance

Whether you own the building you occupy or are leasing a space, you likely own several thousand dollars worth of business property, including computer systems, tools, equipment, and inventory to ensure continuity of business. Property insurance protects these assets against fires, theft, and other forms of damage. Optional features of these types of policies may also cover the loss of earnings as a result of incidents – which should be strongly considered by those seeking commercial property insurance policies. 

General Liability Insurance

This is the most basic and essential insurance policy in the commercial world, offering protections against damages and legal fees related to bodily harm or property damage to a third party on or off your company’s physical territory. General liability insurance is a crucial addition to commercial property insurance and should not be overlooked when considering a new facility for your company. 

Commercial Auto Insurance

For any company with vehicles under its name for employee use, commercial auto insurance is essential. Any vehicle that transports employees, assets, or proprietary information should be insured under these policies to protect against theft, accidents, and acts of God. Even if your company compensates employees for mileage and gasoline for their personal vehicles during business hours, you should invest in non-owned auto liability insurance in the event that an employee doesn’t have adequate insurance in the event of an incident. 

Business Owner’s Policies

These policies, otherwise known as BOPs, offer a bundle of business-related insurance policies, including business interruption, commercial auto, liability, crime/theft, and property insurance. Your rate will depend on your needs, but these are packaged to ensure business owners receive the best rate without having to invest in multiple policies from different providers. 

Professional Liability Insurance 

A professional liability insurance policy protects the company against any failure to render professional services – and isn’t included in a general liability insurance policy. Lawyers, accountants, consultants, and any other professional services provider should invest in this type of policy in addition to commercial property insurance. 

Data and Computer Systems Insurance

When a company collects privileged data, it has a legal responsibility to protect it. Should a data breach occur, this type of insurance would protect the company against damages and legal costs associated with any data loss, breach, or accidental disclosure of such information. 

Directors and Officers Insurance

This policy type protects employees at the highest levels of the company – C-level employees – against actions that could affect the profits of the company itself. Should their performance or actions while employed by the company demonstrate a legal risk or expose the company to a lawsuit, this policy would protect the company against damages and cover legal costs. 

No matter where you decide to set up shop, it’s important to factor in the costs of insuring your commercial real estate lease and property in order to protect your company from accidents, theft, and lawsuits – no matter your industry or area of focus.

Office Building Classes and What You Need to Know

Anyone who’s had a few different homes throughout their life knows there’s a difference between a college dorm and a 5 bedroom estate in the suburbs. The same is true for office spaces. But when searching for new office space, your time and attention is limited, making it important to know more than pictures can show.

Of course, anyone knows a luxury or high-end building when they see it, but real estate professionals take a different standard when rating their top prospects, which come in four different office building classifications: Class A+, Class A, Class B, and Class C.

While it’s easy to distinguish between the quality of these properties based on the traditional grading system, it’s important to remember that determining these distinctions is more of an art than an exact science.

What are the Different Office Building Classes and How are They Determined?

As we mentioned above, there are four classes of rating systems for commercial real estate listings. Before we dive into the differences between the different classifications, let’s take a minute to discuss the factors involved in establishing them:

How are Building Classes Determined?

There are multiple factors that help real estate professionals determine the class of an office building they need to categorize before the listing can go forward. But it’s also important to remember that there are no industry guidelines for building classification. In fact, BOMA (Building Owners and Managers Association) generally resists the publication of building classifications for specific properties, though most real estate professionals base their judgement on current market availability and comparisons to similarly sized properties above all else.

Other characteristics include, but are not limited to:

Building construction material quality and age
Finishing materials and design
Maintenance and upkeep
Capacity of essential services for current and future growth (HVAC, electrical, Internet, maintenance, upkeep, elevator, lobby, power backup, parking, and common area spaces)
Access to major freeways or public transportation
Security
Ceiling height
Location
Construction and common area improvements (either current or ongoing)
Amenities and secondary features (cafes, day care, cafeterias, dry cleaning, copy and mail services, fitness centers, etc.)

Explaining the Differences Between the Classifications

The four rating classifications for office buildings help potential tenants, landlords, investors, and real estate brokers easily compare buildings within a certain market, but they don’t provide a global rating for comparative building spaces. For example, there’s a considerable difference between a Class A building in Boise, Idaho and Manhattan. That’s why it’s important to remember that these properties are rated relative to comparable markets rather than a larger scale, where they may not hold relevance.

Class A+

As you might imagine, Class A+ buildings are the cream of the crop in the commercial real estate market. They offer the finest available materials, best building standards, greatest array of facilities and amenities, easily accessible transportation, prime locations, and stunning views. These properties are typically few and far between, expensive, and highly sought after within their specific markets.

Also referred to as “trophy buildings,” these properties are unique in their technology, design, or sheer prestige. Sears Tower in Chicago, the Empire State Building in New York, or One World Trade Center in Lower Manhattan are examples of Class A+ buildings in the United States.

Class A+ tenants can expect a greater allocation for onsite parking for both clients and employees, on-site cafes, restaurants, banking services, mail facilities, gyms, spas, communal areas, daycares, and more.

Class A

Class A buildings are known for their proximity to central business districts in their markets, often competing for high-level tenants with global name recognition. They tend to have high occupancy rates, few tenants with greater space or floor needs, and top-notch amenities few businesses can afford.

Restaurants, cafes, fitness centers, spas, atriums, day cares, and even retail shopping within the lobby floor are common in Class A buildings. But with no expenses spared, there’s a good chance a Class A building will also be adorned with tasteful decor, modern interior design aesthetics, and high ceilings with employee-friendly overhead lighting. For most markets, these properties are the best of the best and they deserve the higher costs associated with occupying (and enjoying) them.

Class B

Class B buildings tend to be within 10-20 years behind the most current developments in a specific marketplace, perhaps offering similar amenities, but suffer by comparison. Their maintenance, HVAC, and electrical capabilities may not be up to par in terms of current standards, as would the fiber optic and communications infrastructure, but still offer a valuable, competitive office space for most high-to-mid level clientele.

These facilities are routinely updated, improved, and remodeled to tenant expectations, making them an excellent value for potential tenants looking to impress their employees and clients without taking on a Class A-level commercial lease agreement.

Class B buildings are often located off Main Street, offer fewer security and parking opportunities, and require more routine construction and maintenance than a Class A building, but are functional, attractive, and capable of housing modern businesses of any stripe.

Class C

While there are no “Class D” or “Class F” buildings in commercial real estate, Class C tends to scrape each of the latter categories into one. Class C buildings are older (at least 20 years old) and are well-worn.

Multiple tenants over multiple decades have occupied each space, leaving the wear and tear that comes with generations of business taking its toll. They also lack modern expectations of lobby attendants, security, and concierge services, making them less attractive than modern constructions that have these amenities as standard items.

Any building lacking elevator services, lobby personnel, on-site parking, or HVAC will generally earn a Class C rating sight unseen. But for small businesses that rely on low overhead and competitive lease terms, Class C spaces can provide a great jumping off point for those just getting started.

What Potential Tenants Should Expect When Considering Different Office Space Classes

Competing for high class commercial real estate is important for companies seeking popularity on the street level, high visibility in major cities, and those servicing boutique clientele, but there’s an important aspect to keep in mind: these classifications are subjective and don’t always reflect the quality of service a company provides.

When searching for a potential new commercial real estate space, it’s important to consider your specific needs above all else. Classifications are secondary; the property’s capabilities in servicing your company’s specific needs should be considered above all else. While companies in legal, investment, or luxury industries should seek out higher class real estate to attract higher paying clients, most should focus on their overhead, a property’s amenities, and servicing both employees and clients to the best of its ability.

John is the VP of Sales at OfficeSpace.com where he leads broker relations and sales. Prior to being VP of Sales, he was the Regional  Director for the company. John has over 25 years of experience working in the commercial real estate industry. Before OfficeSpace.com, John was a commercial real estate broker for the Norman Company in Seattle, WA.

Brokers, We Want to Hear From You!

We’re interested in hearing from you, brokers! As we continue to grow, it’s important to us that any changes that we implement – however big or small – are always for the betterment of our users’ experience. That said, your feedback is critical every step of the way.

We invite you to participate in this short survey; it will take no more than 5 minutes of your time, we promise! Tell us how we’re doing, where we can improve, and most importantly, what we can provide to help you:

Take the Survey

So don’t be shy, we want to hear from you! You can also reach us at (800) 560-3544 or feedback@officespace.com.

Calling All Tenant Reps!

So many inquiries, so little time

We’ve had a great 2012 and 2013 looks to be off to a fast start.  So much so that we are looking to expand our pool of Tenant Rep Brokers!

OfficeSpace.com has been extremely busy with our Portland, Denver, and San Diego launches and here is a brief summary of 2012:

  • Launched Portland, OR (Jan 2012), Denver, CO (June 2012), San Diego, CA (Dec 2012) AND
  • 243,000 visitors
  • 2,200,000 building views
  • 1,900 leads directly to listing brokers
  • Approx. 10,000 calls to listing brokers

We’re very proud of these results, however, we’re just getting started.

Destination for Tenants

OfficeSpace.com is where many tenants who are just starting to look for space first enter the market. We’re talking to these potential tenants, sometimes they simply request some marketing and listing contact information. Other times, these are tenants who are ready and willing to work with a Broker and this is when we send them to you. We are filling a void for tenants and they are finding us online.

Little Secret

As some of you may know, the OfficeSpace.com platform is open to nationwide listings even though we are focused on our home markets of Seattle, Portland, Denver, & San Diego.  In fact, we continually add new listings outside of our home markets and they are getting indexed.  In the last 30 days, much to our surprise, our non-home market web stats and lead activity has in some cases, surpassed our home market metrics:

  • 52% of visitor traffic was outside our home markets
  • 60% of our building views were attributable to our non-home markets
  • 30% of our leads & inquiries were generated from outside our home markets

The Opportunity

This is where you come in!

If you are an experienced Tenant Rep and would like to be part of our Tenant Rep Broker Pool, please email me at howard@officespace.com with a brief bio and I’ll be sure to contact you.  Oh, by the way, our Tenant Rep Broker Pool is free to join but spots are limited, so secure your first mover advantage and get in early!

If you have listings, get them onto OfficeSpace.com, you will get indexed, you will get exposure, and you will generate leads.

With your help, we’re making finding and leasing space a smoother and easier process!

A Successful Startup Story – Founder’s Instinct, Go Direct.

As I discussed on my last article, The #1 Mistake Many Startups Make When Managing Growth-Remember the Garage?, I wanted to share with you an anecdote from a well established web company in Seattle, that will remain anonymous, let’s call them Dot.com.

Looking Good, Billy Ray! Feeling Good, Louis!

The year is 2010, and Dot.com has done extremely well for themselves. The founder’s acquired the domain name and other assets for under $5,000 and proceeded to build it into a top 100 most visited websites in the US, over a span of 7 years.

They have gone through a couple of office moves. Each move they upgraded and eventually ended up in some Class A space in the heart of Seattle, which  has a fairly competitive office market.

Shortly after they move into their space, they are already needing additional space. They had a couple hockey sticks in their growth chart! The founder heard that the neighboring tenant was looking to sublease some space, exactly what Dot.com was looking for.

Let’s Make a Deal

The founder calls his trusted commercial broker who found them their current digs and instructs them to place an offer of $15/sf on a short-term lease on the neighbor’s space. The broker informs him that they didn’t even get as much as a response to our offer from the landlord’s brokers. The founder assumes that maybe the offer was insultingly low.

The next week, the founder just happens to run into the neighbor and decided to ask about the space, nothing to lose since they already rejected the offer.  It was clear at this point that the neighbor never even saw the offer. Much to the founder’s surprise, the neighboring tenant seemed remarkably eager for Dot.com to pick up their space. They shook hands and came to an agreement for $3.60/sf on the spot.

This is just one example where the broker channel was ineffective and this isn’t necessarily a knock on brokers but more a reflection of the commission based compensation model that brokers live in, a you get what you pay for mantra.

Bravo to the founder for going direct and cutting out the middleman; probably another reason why Dot.com is still so successful.