Triple Net Leases: Allocating Insurance Costs Among Tenants

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The simplest way to divide up insurance costs is to allocate them according to the size of each tenant’s space—the tenant who rents 25% of the building pays 25% of the insurance costs. This method works fine as long as the tenant mix is composed of similar types of businesses whose spaces are more or less equal, value-wise.

How Insurance Companies Set Premiums

When the insurance company set the property insurance premiums for your landlord’s building, it did so after evaluating the value of the building as a whole. For example, if the entire structure is filled with office suites, the cost of rebuilding after a fire is relatively consistent throughout the property. Conversely, a structure with restaurants and other retail shops on the ground floor, but office space above, presents a mix of rebuilding costs. The insurer is likely to estimate the value of the property as the cost of rebuilding everything.

And how should insurance costs be allocated among the tenants? When the property is consistent throughout, it makes sense to share costs according to the size of each tenant’s rental. But if one tenant’s space is much fancier, it’s more equitable to ask that tenant to pay more for the insurance than the plain-vanilla office tenants upstairs. If you happen to be an accountant in this building and your insurance bill is based on the size of your space, you’ll end up in effect subsidizing the restaurant for the cost of its insurance. On the other hand, if you are the restaurant, you’ve got it made!

Fairly Allocating Costs

If you’ve read about how to fairly allocate property tax costs among tenants in Triple Net Leases - Allocating Taxes Among Tenants, you may recognize this problem as similar to the one encountered there, where one tenant’s expensive improvements added taxable value to the property, which all tenants have to pay for in the form of property taxes. The solution there was to allocate taxes according to the size and taxable value of each tenant’s space. The solution for insurance costs is not so simple.

If you find that the property’s insurance costs are being driven by operations whose improvements are more valuable than yours, ask the landlord’s insurance agent or broker to assess your business separately. You may find a cooperative soul who’ll give you an idea of what the -insurance costs for the building would be without the presence of the fancy retail shops downstairs. With this information, you may be able to press for a reduction of your insurance bill.

The difficulty with this approach is that the landlord has already signed a lease with the tenants on the ground floor—and chances are that they are sitting pretty with an unfairly low insurance bill each month. The landlord can’t shift to them what she’s taking from you without their agreement to modify their leases, and she won’t be interested in absorbing the difference. The best you can do may be to keep this point in reserve as you negotiate the balance of the lease, pulling it out when you need the moral or fairness advantage while negotiating another point, or simply asking for less rent.

This article was excerpted from Negotiate the Best Lease for Your Business by Janet Portman

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