Recession - Tools to Insure Against Non Payment of Rent
Good Morning lovely CRE folks!

Below are list of tools I found in a deep dive in the aftermath of Covid where my former employer’s portfolio was -$950K in the arrears (to be fair $350k was him just mismanaging one tenant in 2 spaces unrelated to Covid). 

To speak his language, my presentation was titled “Insuring Against Non Payment of Rent”, so we were speaking the same language, but these products are not all directly designed for this purpose but can used as such. 

1) first you have the personal guarantee that you can add to your lease agreement which basically says that if a tenant fails to pay rent under their LLC or Corp. that the owner is personally ensuring the remainder of the lease term or until it is released to another tenant. These are often hard to collect legally, and if the person doesn’t have the money you’re not going to get it. So obviously screening a tenant at time of tenancy and making sure that they are the type of tenant that can actually cover a personal guarantee is crucial. 

2) my favorite way to ensure against nonpayment of rent, only helps CRE Owners who have a lot of buildings in their portfolio. It is a reinsurance company, (also known as a captive insurance company)these are generally $80-$100k  to start in upfronts/funding but definitely become a source to ensure against nonpayment of rent as well as all of the weird things that insurance doesn’t cover, and eventually when you have enough reserves you can start reinvesting the surplus into real estate, bonds, the stock market, really anything to make money on your money. 

Capstone associates does a great job of explaining this, and has a YouTube video as well on this site for visual people, they tend to be on the higher side in upfronts see Link below. I have a reinsurance agent if anyone needs a referral. 

https://www.capstoneassociated.com/what-we-do/captive-insurance-for-businesses/commercial-real-estate/

3) for triple net owners, I like using using Eulher’s Trade Risk Policy. Invented originally to insure the contract of goods and services between 2 companies, they harvested a niche coverage allowing this to be used in commercial leases so long as the landlord and tenant are LLC’s or corp’d. 

The coverage will pay 90% of a tenant’s rent and additional rent missed for you to 4 months so your cash flow, payroll and distributions to investors can continue while you evict the tenant. 

I combined the square footage of our entire portfolio then assigned each tenant a pro rata share of the premium we were paying while was like $10k total. Then Included that in the operational recoveries so it was cost neutral to insure, and one claim made the entire program cost effective. 

I have an agent with Euhler if anyone is interested in this coverage, this allows you to use it as a tool over negotiating rent as well as you are able to waive the personal guarantee


4). The final program I found to ensure the landlord against nonpayment of rent is affective and only some states but is free to the landlord

It requires you during the screening process to have the tenant or potential tenant apply for a surety bond to cover the term of their lease. If they don’t qualify for the surety bond it’s likely they are more risk your tenant that you are taking on anyways so you may not want to pursue that Tenant

In the event of nonpayment of rent, the bondsman pays you all that you are owed while you evict and the bondsman pursues the tenant for the monies not you.

a good job explaining linked below.
https://www.performancesuretybonds.com/surety-bond/lease-guarantee-bond/

I have someone who can write these too if interested!

That’s all folks from my tips today. Hope it helps some people!
[{"id": "ip3794e", "text": "interesting info, thanks for sharing", "replies": [], "depth": 1}, {"id": "ir1n588", "text": "Thanks for the info, have you had to use any of these insurance policies yet? Was the claim process easy?", "replies": [], "depth": 1}]