Create Win-Win Property Insurance Deal with Tenant

Tenants large and small are attracted to the best deals for commercial space. But savvy tenants know that bottom line-friendly deals aren’t limited to items like comparatively low base rent rates or generous concessions and improvement allowances that beat offers from other landlords. Especially if you need to fill vacancies at your center or office building, it’s important to let tenants know that you’ll do your best to control seemingly small costs that can add up.

While it’s important to make insurance costs reasonable for tenants, be careful not to do it to your detriment. To keep insurance costs low while making sure that you have adequate coverage, consider a property insurance policy with low premiums and a high deductible. But if you pass through a portion or all of those low premiums to tenants, you should negotiate the right to pass through a portion or all of the high deductible as well.

Many tenants will be skittish about this, so to reassure a tenant that’s afraid of being unexpectedly hit with a big expense and wants to exclude your insurance deductibles from its operating expense pass-throughs, you can compromise by taking two steps:

1. Agree to limit the amount of the insurance deductible that you can pass through in a year; and
2. Insist that the tenant pay the portion of the deductible that exceeds the limit in later years. This way, you’re not ultimately responsible for absorbing the excess, and the tenant can pay the excess over time rather than all at once. This compromise is similar to the one that’s frequently reached with regard to other capital expenditures.

For tips on how to use your lease’s insurance provisions to make the tenant share as much of the costs as it will agree to, while still making it a fair deal, see “Negotiate Win-Win Property Insurance Deductible Clause,” available to subscribers here.