An investor in St. Petersburg goes under contract on a 1970s retail strip with good tenants and a price that works. The inspection period is almost over when he asks for an insurance quote. The roof is original under two layers of coating, the electrical panels are a brand several carriers won’t accept, and the building sits in a flood zone his lender will require coverage for. The first quote comes back far above what his pro forma assumed, with a large wind deductible and the roof covered only at actual cash value. He can still renegotiate, but only for a few more days.
Older commercial buildings can be excellent investments: established locations, tenants with history and prices that reflect the market rather than new construction. But insurance for an older building has to be worked out during due diligence, not after closing. What a policy costs, what it covers and which carriers will write it at all depend on details that don’t appear in a listing or an appraisal, and most of them can be found out before the deal is final.
The Year Built Matters Less Than the Systems
The construction date on the property appraiser’s record is the least useful fact about an older building. What underwriters care about is the condition of the major systems, roof, electrical, plumbing and air conditioning, and whether they’re original or have been updated. A 1970s building with a recent permitted roof, modernized electrical and replaced plumbing can underwrite far better than a much newer building where nothing has been touched. The year built sets expectations. Documented condition is what decides the answer.
The Roof Comes First
In Florida, roof condition drives more of the underwriting on an older commercial building than anything else, because it ties so directly to wind and water losses. Before making an offer, find out the roof’s actual age, material and repair history from permits, final inspections and contractor invoices, not from the seller’s memory. A full, permitted replacement reads very differently from a series of patches and coatings over an original roof.
The roof’s age also affects how it’s covered. Carriers often insure older roofs at actual cash value, which deducts depreciation from a roof claim, and some apply separate roof deductibles or limitations. And Florida’s roof rule generally requires that when more than a quarter of a roof section is repaired or replaced within a year, the whole section be brought to current code, unless the roof was built or replaced to the 2007 code or later. On an older roof, a partial storm repair can become a full replacement.
Electrical and Plumbing Decide Which Carriers Will Look
Outdated electrical systems, including panel brands carriers won’t accept, fuse boxes, aluminum branch wiring and service too small for current tenants, can limit which carriers will write the property at all. Plumbing has its own version: cast iron and galvanized pipe common in older buildings are an underwriting concern because so much commercial property loss in Florida comes from water. Find out whether these systems have been updated and whether the updates are documented with permits. Our guide to unacceptable electrical panels lists the common problem brands.
Replacement Cost Isn’t the Purchase Price
Buyers often assume the purchase price is a rough guide to what the building should be insured for, and that assumption causes surprises. Market value reflects land, location and income. Replacement cost reflects what it would take to rebuild the structure with today’s labor and materials. An older building in a strong location may have a market value driven mostly by land and a replacement cost that’s higher or lower than the price for reasons that have nothing to do with the deal. Lenders will want the building insured to its replacement cost, and the carrier will expect it to meet the policy’s coinsurance terms. Get a replacement cost estimate during due diligence. Our article on replacement cost vs. market value explains the difference.
Code Upgrades Are the Larger Exposure on Older Buildings
A building that met code when it was built won’t simply be rebuilt as it was after a major loss. Current code applies to the reconstruction, and on an older building that can mean wind-rated roofing and openings, sprinklers, updated electrical and accessibility work. Depending on the extent of the damage, code can also require undamaged parts of the building to be demolished. Standard property forms include only a small allowance for those costs. Ordinance or law coverage pays for them, and on an older building it should be sized to the actual gap between the building and current code. Our article on ordinance or law coverage explains the three parts of the coverage.
Wind and Flood Need Their Own Look
Most commercial property in Florida is written in the excess and surplus lines market, often with wind written separately or carrying its own percentage deductible. On an older building, that deductible can be a significant amount of cash, and it belongs in the buyer’s financial model. Documentation of roof-to-wall connections, opening protection and roof covering can help underwriters rate the building on facts rather than assumptions.
Check the flood zone before making an offer. A building in a high-risk zone with a federally backed loan will need flood insurance, and the National Flood Insurance Program’s commercial limits and actual cash value settlement on buildings may not be enough for the property. Older buildings were often built before current floodplain rules, which can also bring substantial damage requirements into play after a major flood. Our articles on whether you need flood insurance for commercial property and how to read a FEMA flood zone map go into detail.
If the Building Will Be Vacant or Renovated
Many older buildings are bought to reposition. A building that will be empty while it’s renovated or re-leased raises two questions. Standard property policies restrict coverage once a building has been vacant for an extended period, and most carriers will only cover a vacant building at actual cash value. A renovation may need builders risk coverage, or coordination between the property policy and the contractor’s coverage, for the work in progress. Both should be arranged before closing. Our articles on vacant commercial property insurance and builders risk for renovations of existing buildings cover those situations.
Environmental and Liability Questions
Older buildings can contain asbestos, lead paint or underground storage tanks, and property and general liability policies generally exclude pollution. A Phase I environmental assessment is part of most commercial purchases for this reason. Where it turns something up, environmental insurance can address exposures the standard policies won’t. On the liability side, the tenant mix shapes both the property and liability pricing for a landlord, and the leases should require tenants to carry their own coverage and name the owner as additional insured. Our articles on mold sublimits and pollution exclusions and lessor’s risk insurance explain both.
Condominium Buildings Carry Statutory Requirements
If the building is a condominium or cooperative of three or more habitable stories, Florida law requires a milestone structural inspection once the building reaches 30 years old, or 25 where the local building official requires it based on environmental conditions, with follow-up inspections every 10 years. Associations also have to complete a structural integrity reserve study and fund reserves for the major components it covers. Before buying into an older condominium building, confirm whether the milestone inspection is done, whether it found substantial structural deterioration and whether reserves reflect what the study calls for. A building behind on either isn’t necessarily uninsurable, but it’s a cost that belongs in the price. Our article on older HOA communities covers the association side.
What to Request From the Seller
Ask for roof permits, final inspections and warranties; records of electrical, plumbing and air conditioning updates; prior insurance loss runs, along with what caused each loss and whether the underlying problem was fixed; the current policy, including valuation, deductibles and any exclusions; any wind or roof inspection reports; the Phase I environmental report if one exists; tenant leases and their insurance requirements; and, for qualifying condominiums, the milestone inspection report and the most recent reserve study. A seller with a well-maintained building usually has most of this. A seller who can’t produce it is telling you something about the building. Our article on the hidden costs of deferred maintenance explains why these records matter.
Get the Quote Before the Inspection Period Ends
The most common mistake with an older building isn’t buying a bad property. It’s learning what insurance costs, or whether anyone will write it, after the inspection period has passed and there’s no room left to renegotiate. Lenders need proof of coverage before closing, and a carrier may want its own inspection before binding, which takes time. Starting the insurance process early in due diligence gives the buyer real numbers for the model and a real basis for negotiation. Our article on why Florida commercial deals die at the insurance step covers what goes wrong.
Before You Close, Confirm
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Roof age, material and permit history, and whether the roof will be covered at replacement cost or actual cash value
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Electrical panel brands and wiring, and plumbing materials
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A replacement cost estimate for the building
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Ordinance or law coverage sized to the building’s gap from current code
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The wind deductible and what it would mean in dollars
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Flood zone, lender flood requirements and whether NFIP limits are enough
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Vacancy or renovation plans and how they’ll be insured
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Phase I environmental findings
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Tenant leases and their insurance requirements
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For condominiums, milestone inspection and reserve study status
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A bindable quote in hand before the inspection period ends
For more, see our commercial property insurance page, our Florida commercial property ownership guide and Florida real estate investor guide, how much commercial property insurance costs, what it covers, what it doesn’t cover and commercial property inspections.
Commercial Property Insurance for Buyers With Prestige
Prestige Insurance Group works with investors, buyers and commercial real estate brokers across Miami, Fort Lauderdale, St. Petersburg, Orlando and Tampa to quote older buildings during due diligence, through over 100 MGAs and specialty markets. Send us the address, the roof and systems information you have and the seller’s loss runs, and we’ll tell you what the building will cost to insure and what could get in the way before your inspection period runs out. Call the office nearest you. Se habla español.
Miami: 305-969-8776 Orlando: 407-993-2331
General information only, not legal advice. Underwriting guidelines, roof valuation, flood program terms, condominium inspection and reserve requirements, and building code rules vary and change; refer to the policy, your lender and the applicable statutes for the terms that apply to your purchase.
