Episode 133 - Insider's Perspective: Commercial Property Insurance Essentials with Stephanie Cliff

What is up and welcome back to another exciting episode of How to invest in commercial real estate. And as you can see, we have a super awesome guest on the show, uh Stephanie Cliff with Hub International who really lives and breathes, you know, commercial property insurance, which you know, sounds thrilling. I I know, but if you're going to be investing or involved or anything in commercial uh real estate investing, you have to insure it, right? Like not insuring commercial property just isn't an option. So you've got to find a commercial real estate broker or commercial real estate insurance broker. I can't even think. But anyway, before we get too deep into that, I wanted to give a big shout out to Maver Bank, which is uh one of our favorite your banks here in Tulsa, they hooked us up with courtside Thunder tickets to Tuesday's game. Absolutely amazing against the uh Minnesota Tim rules. Yeah, the league's best record and the Thunder absolutely owned them. We won by 23 points and we did something that has not been done since 1980. We had four guys score over 20 points and all four of those guys shot greater than 60% from the field.

It has not been done in 43 years. So it was an awesome game to go to. We had a total blast. Uh Shout out to Chris Odom at May Bank. Yeah, and and maybe we have, we have a lot of deals with maybe bank, right? We we we have a deal getting finalized with Ma Bank right now um at the turn of the year. So we, we love using local and regional banks and I would highly encourage you if you're needing a loan, reach out to ma bank. They've been amazing to us anyway, without further ado back to Stephanie insurance, walk us through it. So we have uh a commercial real estate property under contract. Somebody mentions insurance. It's most likely not on the forefront of your mind. You're like, oh crap. You know, I need to insure this thing. You're looking for recommendations. You're probably getting a few from other commercial real estate investors. You know, maybe the show, what is kind of the first step in evaluating or, or, or looking at that insurance on a, on a piece of property. And let's just for argument's sake. What are we gonna insure today? We're gonna insure a $5 million multi-tenant retail building because that's what we do. A lot of. Ok, perfect. All right. Well, easy enough. Um The biggest part of commercial when you're underwriting is the information on the building.

So, construction data year built, especially if it's an older building, we're gonna wanna know exactly when the roof was last replaced, the heating, the electrical plumbing, those are the things that the underwriters look at first and it's probably the most important thing. Um, because from then, even if it's an older building, if it's been completely redone, if it's updated, if it's been maintained, well, that's gonna go a much longer way than, than someone who, it's an older building, decrepit has issues, hasn't been updated, old roof, especially in wind tail prone areas like Oklahoma. Let me, let me take a step back. So if you're a new investor and this is your first property, uh who do they need to go to? Right? Can they go to a bunch of different people? Do they need to pick one person, talk to us about that process because they're gonna want to know step by step. Like I don't know who to call and tell us how that goes. How, how should they approach getting uh talking to the companies and getting that first insurance? It's probably not the regular insurance person because most people have an insurance person.

State Farm farmers, they're probably not going to be nearly as competitive on, on something like this, I would imagine. Exactly. So like Hub International, we're an independent insurance agency which means that we do not have to contract with one company like State Farm. So we can approach literally hundreds of insurance companies. So it's important to find someone that can access many markets. And usually we get a lot of calls from referral base. So the banks, you know, other people in real estate, our existing customers are telling people, hey, here's who I use, here's who I trust. So, referral basis is a really good way to find who you'd like to look at your insurance. And from there you wanna, you just wanna find someone that knows real estate, property insurance, real estate, um there's a million different kinds of insurance and types of accounts and someone who's specialized in real estate insurance is going to know exactly what markets know which questions to ask, do a good job negotiating and even more importantly, has the relationships with the underwriters that are gonna get you your best results.

So because you have so many relationships, is there a reason to go? I mean, you can go to lots of different companies like you said, is there a reason to go to more than one company such as yourself or, or do you like? Would we kind of get used to using Hub because hub has, you know, represents so many people. How does that work? So you can go multiple agents, agencies? Um There you can only access a market can only be accessed by one agent because some, some crossover, I suppose, right? So they were, they may, we may say we want to go to these 10 markets, they may have the same 10 markets, only one agent can approach them. So in a really competitive insurance market, sometimes, you know, there may be 2030 companies that want to quote a piece of property right now, we're in a very hard market cycle. And so there may be only three companies that are really going to be competitive on that. And so using multiple agents in in this kind of situation, sometimes puts you at a disadvantage because you may need a layer of program.

So you may need all three markets to be involved. And if one agent has two of them and you have one, getting a whole program put together may be more complicated. So again, we do see competition and we have sit situations where we do market selection or, you know, we kind of work with the, you know, they pick two agencies to quote. Um but it really kind of depends on the type of business, the type of property, you know, and, and what the insurance market is doing at that time of what's the smartest route to go and have again, one person kind of do all the marketing and get the best results versus, you know, in a more competitive marketplace, it may be different. So it, it sounds like the big difference from what I'm gathering in insuring a home or a car versus a commercial property is like you said, Farmers State Farm, they're exclusively selling their own product. So you're, you're bidding their exclusive products against each other which naturally have variances in pricing. Whereas you're a broker going out to maybe, you know, tens and tens and you know, several different markets, bidding that insurance for us.

I is what it sounds like and then just kind of making sure we have the right insurances because there is. So, I mean, you can insure everything. You can absolutely insure everything. So you want that sweet spot of, hey, you're covered, but you know, we're not insuring the bolts on, on the wall, you know, for $50 a year each or something ridiculous. And sometimes with those, you know, State Farm. Yeah, and, and farmers there are their forms are pretty set. You can, you can tweak a few things here and there. Um but they're not as specialized sometimes as you can get with other markets where literally Lloyd's of London, you can write it to be in any, any way you want. Obviously there's a cost with everything but the different companies has more, they have more specialization and you can customize your coverage when you know, State Farm and farmers like your personal insurance. You can look at deductible options, you can tweak this and that, but it's, it's more of a set kind of policy form. Um So, you know, we've got this $5 million multi-tenant retail shopping center, we've established, we need to go to a broker to, to bid competitively and, and just specifically northeast Oklahoma, like you kind of alluded to earlier, we have a lot of wind and hail exposure.

So there's not necessarily a lot of competition in people wanting to insure those $5 million multi-tenant retail buildings in Oklahoma. When you, when you look at like the exposure of a Las Vegas roof right there, there's, there's no wind and there's significantly less wind and hail events and the roofs last 2 to 3 times longer out of the same material because they just don't have the heavy weather we have. So it's things like that that I think are, are the massive differences. But what are the main things we need to be looking out for? Again, we've got this multi-tenant retail building, we've got a dozen different tenants who are all paying us rent. We've got, you know, all of this information that we've kind of gone over to you. And I'm assuming you're using that information in the beginning to, to bid competitively. If you don't have that information, I'm sure it's more expensive just because they don't know. Correct. And sometimes it happens, you're gonna buy a piece of property and the person who owns the building right now has no idea what the roof age is. You know, they did, the data is just not, it's been passed maybe, you know, hand to hand for several years and it makes it much harder.

I again, it's easier, the more data we have the better um the more updates, I mean, the tenant list again, you know, there's a difference they, they're gonna underwrite for if it's, you know, just AAA floral shop versus cannabis versus a nightclub, you know, the the type of tenants too really drives the insurance cost. Um And what types of insurance are you gonna be quoting? Obviously, we have the building protection but is there other liability protection and things? Is there gonna be multiple policies that you're gonna provide? That's a really good question. So at a basic, at a bare minimum, it's always the property insurance which is to the building and anything that you own attached to the building, then your liability insurance. So if there's a slip and fall in the parking lot, um, or even in the tenant space and somehow you get drug into the lawsuit, their insurance should provide primary coverage, but you want a backup coverage just in case. Um Are those, are those common, Joel, these uh general liability lawsuits? Are these common in owning real estate? Do we need that insurance? Yes, I don't know that they're, they're common, but we have run into issues before uh, not only slip and fall but also, uh, we've had, let's say a sewer backup where not only did it damage the sewer but then the sewer floods into tenant uh uh spaces and they, they may have insurance but they may, they may sue us because of, maybe they'll try to claim that we were negligent in maintaining the sewer.

And so we, our insurance should pay for their, uh, damages inside their space even though they're supposed to have insurance for that. So there's all kinds of liability there, uh, that you can run into and these different policies are they always going to be with the same company or could one liability be covered with one company and property with, with there's companies that will package them together, the property and the general liability and then there's sometimes where is the best property market does not write the liability and so you would separate those. Um So it just depends really on the the best option of, of what you can get on both sides. So and another note for the investors listening is a lot of times, uh it depends on what kind of loan you're getting on, what kind of insurance you have to have a local bank is not going to be that specific on what types of insurance coverage you have. Uh But if you get a government insured loan like a Fannie Mae Freddie Mac or hud loan, they're going to be very specific on the amounts of coverages you need typically mo more onerous than you really need or you get on your own.

And so then they have to quote, you know, per the guidelines of Fannie Mae and Freddie Mac Fannie Mae requires terrorism to be included on property and liability, which obviously there are events that, that would, that would come into play. But East Tulsa multi-tenant, you know, big terrorism hub, everybody wants to get in, get involved in that and it's, and it's an additional cost of premium and, but the lender it, it's a requirement and you get stuck with it. So like Joel said, there are many things that the lender can drive. Ok? And so if one of our investors says, ok, I'm, I'm thinking about buying a property and it's anywhere in the country it's in Delaware. Can they contact someone like you and Tulsa and you can cover, you can write a pool or, or get policies for anywhere in the country. So we're licensed in all the states. Um And again, we have clients that have buildings all over the US and well, you guys write precision equities insurance, right? I mean, precision equity literally has properties and once you find someone that, that you work well with, you can kind of stick with them because they can a lot of them, the best ones can kind of write anywhere.

So you don't have to find someone in that, right? And at my company, we have a, we have a special real estate group within the people that are at hub and they have a focus on real estate in order and we have this set up. So we have monthly calls to kind of keep and update with what's going on, you know, in Massachusetts versus Oklahoma. Um, and, you know, email each other when, when you've come across something like, ok, I've had this issue which there's many places right now in the US that are dealing with insurance problems and wind and hail and tornadoes that have never had this. They've never experienced this. They've never had the tough kind of placements like we've had, we've lived in for years being in kind of tornado alley. So, you know, those people are now in a different market situation than they've ever been and don't know how to explain necessarily a percentage when inhaling, you know how that, how that works. And so we have a network to kind of help it, help us all out. Ok. So, um, this maybe this goes to the three of you, but let's say, um, that we're buying a property and, um, the current insurance is like for $4 million.

Um, but, but it's been around for a while and we go and, and we, we pay $5 million. So do, does an investor need to know that their insurance is gonna go up because they're actually buying the property for more than maybe it was worth when the previous policy was written. Does that make sense or it's badly worded? But I get what you're saying. Yeah, poorly worded. But you get my point, right. And I'm interested in your opinion on this, what I've seen over the past, you know, kind of year is a lot of pushback from these underwriters on your, your insured value. Right. You used to be able to go and buy a 2 million million dollar building and, and they would kind of let you insure it for whatever you wanted within a reasonable amount. And now I'm seeing a lot of pushback, but they're like, no replacement cost on this is way more. I don't care if you paid $2 million for it to replace. This is £3.5 sand. That's exactly right. So yes, they value it based on replacement cost. So construction cost and now we have data and obviously the last couple of years and the construction has really shot up and because they used to kind of let you almost pick your own limit.

Um They started having a lot of claims where they realized they were severely under insured. So the last two years, they have pushed really high increases because they were real, they realized they were so poorly uninsured before. And so they have all of these, we have, you know, these online platforms you put in the zip code, you put in the basic building information and it spits out, you know what they feel is true replacement cost. And they wanted to, you know, in that range, which is usually a big difference in what we have been insuring it for. And so that again, you increase your limit, increases your premium. So it just gets passed on. You know, it's one of those things that the insurance companies aren't going to lose. So if they make a mistake and they underinsure and let's say we have a couple of Hurricane Katrina's roll through and they were underinsured, they're just gonna start adding that to everybody's premium around the country until they make it all back. They're charging it back to the game. That's right. And uh so that's really important to remember. Another thing is, uh it's really important when you're underwriting and you're, you're evaluating a net operating income which has an insurance value from, let's say the seller, they may give you their current insured costs, but uh you need to get your own quote because like we're saying, they may have, they may have purchased it for three or 4 million and insured for that.

And now you have to insure it for 5 million. That's your purchase price. And then insurance rates are higher. And so you gotta build that into your model. Now with multi-tenant retail, if it's fully triple net, then you can essentially pass that on to your tenants. The only caveat is, is that if it's a huge difference, you gotta weigh that. Ok, my tenants, are they gonna be able to afford that? Is that gonna put undue burden on them uh in their, their rent payments now, if you're gonna buy a multifamily though, uh that's on you. And so there's nobody to help you with that cost because the multifamily tenants aren't going to pay the increase in that cost. So you've got to make sure you've got that built into your model. Otherwise the noy that you thought you were gonna get, you're not gonna have. So, you know, I think the insurance, you have to realize how this works, right? They're collecting premium as, as a percentage of what they think the risk is that it, a catastrophe is going to happen and they're gonna have to come out of their pocket to pay for this. So if you've owned a building 1015, 20 years and you've paid in all this premium, you're probably, and you haven't had a lot of claims or losses or catastrophes, whatever we're calling them, you're gonna get a better deal on that, that property than I would as a brand new owner because they're pricing in, I've collected no premium for this guy.

I have no idea who he is. And now the building's 10 years older than when I haven't been insuring it. So it, it's all these things and I think that was a big mind-blowing thing for me in, in real estate because we start getting into commercial real estate investing and, and almost the entire process is negotiable. I mean, you're, you're kicking the appraiser, you got the environment like you can beat up everybody for a few $100. But like the insurance cost is just the cost of insurance a lot of the times. And I, I hate that, you know what I mean? It goes, you have a lot of control, you don't have any control. But again, most people, you're just like, you know, an environmental is 2500 bucks, man. If we do this for two, I'd, I'd wire the money today. Ok? You know, I'll do it for two and the environmental is great. You know, I'm not looking for a great quality environmental report. I'm looking for the one that passed the test. You know, it's not a, I got a question. I got a question. So, uh we've had a couple of good insurance brokers over the years and one we'd had for years and I trusted them and I felt like we were doing a good job and then, uh we went and got a bid from a new insurance company to ask the question.

I was gonna, yeah, and uh I'm just gonna use some numbers. They're not gonna be totally accurate. But let's say I was quoted $100,000 for uh for premium and I go and I bid it and somebody new comes in and bid $60,000. And so this guy that I or this company that I trusted uh for all these years was saying the best they can do. They said we've searched the market and they presented me with this booklet and it shows how they went to all these companies and the best they could do is 100,000. And I go to somebody I've never met before and they're, yeah, and they're, they're saying, oh, it's 60. And so they just literally save me $40,000 a year. Uh I don't know them. And uh so my question is, was that company that was quoting me 100,000? Were they making excess profit because I was an existing customer or why was this person? I didn't know, able to save me so much money? Uh Is it because I'm getting a new customer discount because they're trying to attract new business? How does that work? Tell us what we should be looking out for and how often we should be bidding the company that we like used year to year. That's the wrong. She's like, never, never Rebid your interest.

This is, this is valuable for the good question. No, it is a good question. And it's, you know, the the different companies have different ways they go about it. There are brokers who when targeting new business will go in and they'll cut commission on that first year, kind of make a splash and eventually get it added back in is typically how that works. So there's also, I mean, when the market turns and becomes much softer, there's more competition and there'll be companies that kind of come out of nowhere. And so if you're not really plugged in to everything that's going on, you may overlook a market that you didn't know is now writing multifamily last year. They said no, no, no. And so you're like, they don't write this. So those, those relationships can change where then all of a sudden another company comes in and can be so much more aggressive because of just the relationships they've built or how the market changes, literally sometimes on a daily basis. Um And I think it's good again, you wanna make sure that you, you do have extreme trust in your broker that you feel like they are doing their best, doesn't mean that you don't ever vet them out.

But I mean, service issues, we've had accounts where we, we got accounts because someone moved to another agency who got a great deal, literally playing on a golf course with the underwriter and talked him into something. So they wrote it a very large property deal. That agency, that team had no idea how to handle that. They were not equipped to issue hundreds of certificates to do a premium allocation by each location. And so that's worth its weight in gold, right? So they struggled for a year and were immediately, I mean, they were, they, they said we cannot, we cannot renew with you and we're ready to just sign everything over to us because there's different parts again, real estate can be very complicated. And so you wanna make sure that, that whoever you're working with has real estate insurance background and has the team to support that. Um But again, you, there are times where people get, you know, kind of set and, and you get into, you know, and your routine and maybe they are not actively bidding it as hard as they should. Um But again, that the market can change at any moment.

So it's probably either some another brokerage that just the way that they target new business, like you said, new, new customer discount. Um But whatever, even when you're looking at other brokerage, you wanna make sure that you have a team that, that can support the business. I, I will say we do put a high priority on customer service and professionalism that is really, really important. Gosh, you're so needy. I am, but I, I will give this advice to people listening. Uh This is my professional advice is I think you should probably, despite how much we like hub and we like Stephanie every 34 years, you're gonna have to go and try to, to bid. Uh just because we found that every once in a while, uh there'll, there'll be someone out there that can provide a better quote, even if it's to keep your current insurance agent honest or to make them more aggressive or maybe have them reduce their fee just whatever. So, you know, don't get complacent. You shouldn't, you shouldn't have the same insurance carrier for 8, 10 years and never have put the pressure on them by going out and getting bids from a third party.

Well, I would say broker not carrier. Right? Like, if you're owning that property in Northeast Oklahoma, Zurich is writing your insurance. I hate to, I hate to break through. Right. Like, does Zurich write your stuff in Northeast Oklahoma? I don't know. Yeah. Anyway, so we kind of got through the first deal we've established, you need to get a commercial insurance broker. It's, it's vitally important. It's not like a residential home, but another difference between and I'm constantly comparing things back to residential, single family homes just because I think that's like the most common relatable barrier entry to real estate investing. Um I nothing wrong with single family homes. I love single family homes. They just operate different than commercial and we're highlighting the differences. So we're on to the second one. We're onto the third one. It's been six months since we bought this first deal and I'm calling you back because we had a good experience. But I'm like, hey, uh Stephanie got this other dealing contract. It's similar. I need, I need a new policy. I need a, I need a brand new insurance policy. You're gonna be like slow down, you know, tell me about the property. How, how does it work with subsequent properties? What, what are some of the terms on on the renewals uh or what are the terms of the insurance?

What do the renewals look like? How does it go on once we get that policy set up? Right. So what we prefer to do is as you add properties is to consolidate and make and put them if they can be on one policy or group of policies. So the more you have more buying power that way, also the bigger your portfolio, the more negotiation and power you have in the marketplace, companies, you know, with this, the the economy of scale, especially if they are in different states and you have spread of risks, not gonna have if everything's in Tulsa and there's a big tornado or hailstorm, you know, they, they like more of spread of risk, but the more you can put together, then it it increases your buying power. So what we typically do is, you know, if it makes sense, would add another location to your existing policies. If that's the most competitive route, sometimes if there's, you know, not a management agreement that allows you to combine them or different ownership, you would do it separately. Um But ultimately, the best thing is to try to get at least your effective dates to line up.

So you're not having an insurance policy renew every month, which we've had we've seen happen because, you know, a new policy gets put in place every time there's a new deal and keeping track, you know, no one except for me, wants to do insurance every day, you know, so you don't want to have to deal with that every month. Um, or, you know, multiple times during the year. So you, if you can try to get it all on one date, you know, all combined on one policy, it's usually the best way to go about it. Completely agree with that. Yeah, I mean, again, just relating it back to insurance, you're trying to derisk the deal for the insurance carrier, right? So the more premium you can throw their way instead of giving, you know, 10 different carriers, $10,000 each. If you give one carrier $100,000 you know, you're worth their time, so to speak. Yeah, and just going back to it, they're, they're playing the game of ok. If I'm getting $100,000 of premium versus 10 a bunch of just $10,000 going to a bunch of different people now, they can say, well, yeah, I I can see how we may have an event with one property, but I'm getting all this premium that really helps and it, it gives you a reason to diversify your portfolio around the US because like like you said, Stephanie, if you're all in northeast Oklahoma, you have a tornado risk or one storm, one hail event can damage all of the properties.

Same thing with the Gulf like if you're strictly a Gulf coast investor or something like that. Uh But if you have uh you know, properties in Vegas and you have properties in Omaha and you have properties in, in Dallas, well, the same storm system isn't going to hit all of those at one time. So there inherently is less risk. Um So it gives you a little bit better deal on the insurance if you consolidate those into a master policy. Ok. So we do, do we do that or do we have different policies on each property? No, it's one policy, one policy. Yeah, I kind of set, I set it up, I set it up. Um ok. Last question, we'll kind of get off here. Um How do we, how do we pay for this insurance? It was uh enlightening to me, you know, one of the things I learned along the way is, you know, maybe you don't have to pay for all of the insurance immediately or maybe you do, but there's some sort of financing options out there, which again, it would be very interesting to a lot of listeners because I know I just renewed our insurance policy and it was, it was a strong six figure insurance policy. So being able to finance that or or have some other creative options, there are extremely valuable, right? Some companies, insurance companies offer installment plans.

So that's the best route to go if you want to kind of spread it out if they will offer that. Now, some of them don't, it's full pay only, but then you can do a premium finance and hub, for example, we have four different companies that we use to get premium finance quotes. So you can compare the rates and the terms, obviously, the rates have gone up the last year like all interest rates, but it helps you be able to spread that out and not have to pay such a large lump sum at the beginning of the policy period. Well, I think this was an amazing episode. A lot of people don't think about insurance. A lot of people don't think about taxes. They're not the most thrilling things to think about. I, I'll be honest, I'm not the first one to go pick up a book on, you know, commercial insurance. But through talking to our brokers and having these conversations, you always walk away with a little piece of, you know, info and insurance is that you're like, man, that is, that is so cheap and I really see that happening like uh cyber terrorism, I think is, is a fairly cheap product right now. And when you think about it, like somebody hacks in your email and says, you know, somebody could hack into my email and just say, you know, hey, Brian email me $5 million.

I mean, you're not gonna do that obviously, but there's people out there that have email really anyway, I'm getting too far to the weeds. It's true. Stephanie, if somebody's watching this, they're buying a property, they want to get an insurance quote. How do they get in touch with you? Um, so you can go to the website Hub, international.com. But, um, also, and my information, you know, you can go to the staff information. Um, but yeah, Stephanie Cliff Hub International, um, which, that's my email address kind of long. We'll put her information in the link below uh the youtube video and uh make sure you guys get that information much easier. Um Awesome. Well, until next week, thanks for coming on 70 Happy New Year, everybody.