Many triple-net leases also include a tenant right to terminate in the event the building is substantially destroyed by fire or other perils. The extent of damage required to permit termination varies widely and has a dramatic effect on pricing of the insurance. For example, some leases will permit termination if damage occurs which cannot be repaired within 90 days. Other leases permit termination only if 50% of the building is destroyed, and then only during the last five years of the lease. Regardless, the casualty insurance policy addresses tenant termination just like it does for condemnation. If the tenant terminates, the policy pays the lender the unamortized balance of the loan and the insurer takes over the lender's first mortgage position.
Properties that would represent undesirable risks for traditional insurance carriers also are unattractive to the lease termination insurers. Examples are high-profile buildings in perceived terrorist locations such as New York City and Washington D.C., sites in high severity earthquake areas such as California, and coastal properties subject to hurricane. These may not be completely uninsurable for lease termination, but the pricing may make the transaction uneconomical to complete.
Many factors contribute to determining how much insurance is actually available for a specific transaction. It is beyond the ability of this article to specify all of them. Suffice to say that any single asset in excess of $100MM loan value is going to be difficult to insure at a competitive price, and amounts much lower than that may all that is available for less desirable transactions.
Brightway has access to a wide variety of markets and currently works with several A-rated providers of casualty and condemnation insurance.
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