How This Difficult Insurance Landscape Puts Commercial Real Estate Owners at Risk

Why Does Fannie Mae and Freddie Mac Compliance Matter?

If you’re looking to make a commercial real estate purchase with financing, it’s important for your commercial mortgage to qualify for backing from either Fannie Mae or Freddie Mac. Why? Because if you have a qualified agency mortgage, you’re eligible for better mortgage rates and terms. Over the life of your commercial mortgage loan, those favorable terms can have a significant financial impact.

For your loan to qualify for Fannie Mae or Freddie Mac backing, though, it must comply with the letter of their law.

How to Comply with Fannie Mae and Freddie Mac in Today’s Insurance Landscape

Full compliance includes numerous requirements, two of which are particularly relevant today.

1. Liability Policy Exclusions
   For Fannie Mae or Freddie Mac to purchase your commercial mortgage loan, they require the borrower’s liability policy to not contain certain key exclusions.
   These exclusions include:
   • Assault and battery
   • Firearms
   • Dogs
   • Sexual assault

   The problem is that it’s becoming increasingly difficult to secure insurance that does not name those specific exclusions.

2. Adequate Flood Insurance
   If your commercial property is in a special flood hazard area (SFHA), you will also be required to purchase adequate flood insurance.
   To meet the requirements of either Freddie Mac or Fannie Mae, that means enough insurance to cover the total loss of the bottom two floors of your entire building. (To get a better picture of all the flood-related insurance nuance, see the full Freddie Mac or Fannie Mae guidelines.)

What Options Do Commercial Real Estate Owners Have?

As the commercial insurance landscape has changed, it’s become more difficult for borrowers to comply with mortgage-related insurance requirements.

That doesn’t mean it’s impossible to secure those more favorable terms and rates offered by Fannie Mae and Freddie Mac compliance. But doing so does require:

• A strong knowledge of the commercial insurance landscape today.
• An actionable plan around how you’re preparing for the commercial insurance landscape ten (fifteen, twenty) years down the line.

As just one example, take the increasing prevalence and severity of natural disasters. Especially if your properties are in a high-risk area, you must have a strategic plan for how you’re going to solidify, reinforce, and protect your commercial properties against catastrophic loss.

This includes rethinking your capital expenditure strategy. Obviously, no one wants to hear they need to increase their expenditure budget, but investing now and strategically through the years can do two key things for you:

• Save you money in the long run. Certain strategic upgrades are upfront expenses, but they can save you in operating costs, maintenance, or loss over time. This includes everything from installing hail-resistant roofs to moving any mechanicals off flood-prone floors.
• Ensure your commercial buildings stay insurable. As these natural disasters have increased, insurance premiums have become more expensive, deductibles have increased, and available coverage has reduced. In this landscape, coverage this year is no longer a guarantee of comparable coverage next year. Making these kinds of improvements helps ensure you’re able to secure adequate commercial insurance and financially protect your asset portfolio—today and down the line.

When real estate owners decide to make an investment, they pencil that transaction out, charting how much money they anticipate it costing and making them. Based on those calculations, they can then determine how much they can finance the property for.

But here’s the problem. Penciling out those deals accurately requires anticipating insurance costs—not just today but many years down the line. When commercial real estate investors buy these deals, they’re thinking in terms of mortgages, which often have hold periods of ten to fifteen years. If they don’t account for rising insurance costs and the increased difficulty of securing adequate insurance coverage, it becomes a coin toss whether those investments are financially sound.

Misunderstanding the insurance landscape or not having an adequate high-level view of its policies, rules, trends, and nuance can have financially catastrophic results.

“If you want to buy a building in Florida, that’s completely fine. But understand you’ll have a chronic problem to deal with, and that problem is insurance,” said Mitch Davis, senior consultant and founder of MB Davis Group. “If you don’t anticipate you’ll have an insurance problem with that investment, you will lose money. Without understanding that going in, the deal won’t ever pencil out properly.”

Get the Help of a Qualified Commercial Real Estate Insurance Consultant

Commercial insurance is changing every year. It’s more expensive than ever. It’s harder to get adequate coverage. Terms are consistently worse.

If you want the best chance at favorable insurance for your real estate portfolio, including benefiting from the mortgage rates and terms offered by Freddie Mac and Fannie Mae, don’t go it alone on your commercial real estate insurance.

Enlist a real estate insurance consultant who can give you customized, tailored advice to your specific situation. Just like with a capital expenditure strategy, it is an upfront investment. But that investment can pay off many times over.

Ready to talk through your asset portfolio and the challenges you’re running up against in your insurance program? Reach out to MB Davis Group today.

With over 120 years of combined commercial insurance experience, we’re experts in helping commercial real estate owners get the best possible coverage for their portfolios.