Tag Archives: property

Market Trends & Indicators

Commercial Property Insurance

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As with any insurance market, the commercial property insurance market is constantly evolving, with new trends and challenges emerging that can impact both insurers and policyholders alike. Across the country, there have been several regulatory changes in recent years that have added costs and increased compliance requirements for insurers in this space. Specifically in California, there has been an increase in non-renewal notices as many insurance companies withdraw from the marketplace, most notably in Los Angeles County but also throughout the entire state.

Premium Change for Commercial Property, Q1 2017 – Q4 2023 from  The Council of Insurance Agents & Brokers.

California has become one of the most difficult places to write insurance, so many carriers are exiting the market, reducing capacity, or only looking to insure best-in-class buildings.

Risk. Concern has grown over the incidence of natural disasters including wildfires, flooding, landslides, and earthquakes. This has caused premiums to further increase and caused reinsurance costs to be passed down to policy holders.

Insurers also consider a property’s likelihood for litigation and heightened number of claims. Multi-family is considered high risk because the human factor by nature yields an increased frequency of claims. The same can be said of retail shopping centers where there is increased foot traffic. In essence, the more people, the more claims. Industrial buildings and office properties, on the other hand, are considered moderate to lower risk, unless they have a very high vacancy rate which can make them susceptible to theft.

Building Age: In Los Angeles where the building stock is aging, the preferred market prioritizes either structures built within the last 30 years or those with records reflecting regular maintenance and upgrades. Insurance companies don’t inspect properties every year, which can have unfavorable outcomes for buildings that go several years without review. For example, many carriers are shying away from Los Angeles’ Downtown and Garment District because of the high incidence of claims coming from older warehouse and manufacturing buildings that haven’t been kept up. A lot of these older buildings are being placed on the Excess and Surplus Market (E&S) when the risk is too high to insure, which results in higher rates, and in some cases, limited coverage.

Here are some strategies:

  • Maintain accurate records. Well-kept documentation is the best tool an owner can have to prove the maintenance and renovation of their property. Remember: to secure a carrier in the preferred insurance market, the building does not have to be new, but the systems must be up to date. A 100-year-old building can get placement if inspections and records reflect optimal maintenance.
  • Check your online presence. These days, Google is the number one underwriting tool for insurance companies other than classic in-person visitation. If you haven’t already, Google your building to see what an agent will see online, then take action to improve your property’s virtual presence. This might mean removing encampments, replacing a roof, and cleaning away graffiti.
  • Practice preventative maintenance. If you don’t have a regular and consistent maintenance plan in place, it could lead to higher rates. Keep in mind that many industrial buildings were constructed 40 years ago or more, which puts them at the tipping point when it comes to insurance. Carriers are looking very stringently at buildings that have not been well maintained, but making regular improvements can improve your odds of good coverage.

Commercial Property Insurance

Commercial property insurance covers the physical building of your business and all of its business assets including inventory, products, equipment, furniture, personal property). This commercial property insurance coverage provides protection for types of damage from fire, theft, natural disasters, and vandalism. It is necessary if you own or lease your property. 

You can insure your property on a replacement cost or actual cash value basis. Replacement cost reimburses you the actual amount to replace the lost or damaged item. Actual cash value is the replacement cost minus depreciation—which may not be enough to replace the damaged property. 

Commercial crime insurance and equipment breakdown coverage are insurance policies that can be grouped under commercial property coverage. 

Casualty Insurance

Casualty insurance is a group of liability policies to protect your business from any liability claim you may face. It usually includes these types of commercial insurance coverage:

  • General liability insurance: General liability coverage protects your business from liability if a third party suffers bodily injury or any other accidents on your property. Damage to their property and advertising injury are also covered under this insurance policy.
  • Workers’ compensation insurance: Workers’ compensation insurance helps protect your employees from on-the-job injuries. If an employee is accidentally injured at work, it will cover their medical expenses and a portion of their lost wages.
  • Errors and omissions insurance: If you make a professional error in the course of your work, it can cause serious issues. A client may sue you for damages, which is where a professional liability policy can help protect you and your business. 
  • Cyber liability insurance: Cyber liability protects your customer’s data. If it’s compromised, this insurance covers notifying your customers, credit monitoring, and identity theft protection. 
  • Employment practices liability insurance (EPLI): EPLI protects a business if an owner or manager is accused by employees of sexual harassment, discrimination, wrongful termination, etc. It can help cover the cost of a legal defense and possible settlements. 
  • Directors and officers liability insurance: D&O Insurance protects directors and officers and their personal assets from losses if they’re sued for actual OR alleged wrongful acts while they manage a company or organization. It covers legal fees and other costs associated with claims.
  • Commercial umbrella insurance: An umbrella policy helps you cover claims if they exceed the limits of an underlying policy. It can be more cost-effective to purchase this insurance instead of upping the limits of other policies.
  • Commercial auto insurance: Commercial auto protects your business and employees if accidents occur that damages another vehicle or property.

Commercial property and casualty insurance are often sold together as a package deal, similar to a business owners policy. We recommend speaking with an agent to determine what types of casualty coverage you need to include in your insurance package based on your business type.

Governmental

New 4-5.5% ULA Transfer Tax for Properties Sold in the City of Los Angeles

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Measure ULA, commonly known as the “mansion tax,” would impose a new “Homelessness and Housing Solutions Tax” on transfers of residential and commercial real property in the city of Los Angeles valued in excess of $5 million.

Under the measure, sales of residential and commercial real property valued at over $5 million but less than $10 million would be subject to an additional tax at the rate of 4%, while sales of properties valued at $10 million or more would be subject to an additional tax at the rate of 5.5%. The new tax would apply to the entirety of the sale value, not solely the amount in excess of the $5 million and $10 million thresholds, and regardless of whether the property is sold at a gain or a loss. The thresholds would be adjusted each year based on inflation. The tax would apply to property sales occurring on or after April 1, 2023.
The new tax would be in addition to the existing documentary transfer tax imposed on property sales in the city of Los Angeles, which is imposed at a combined city and county rate of 0.56%.

This tax will have a negative impact on property sales, especially industrial real estate sales given they are generally sold at a higher value than many other types of properties. The tax could possibly make properties in the City of L.A. less attractive to buy.

Who will end up paying the new real estate transfer tax? Below are the percentage of sales based on recent data for each property type.

  • Single-Family Residences and Condos: 2.6%.
  • Multi-Family Apartment Buildings: 6%
  • Commercial (office buildings, retail, etc.): 11%
  • Industrial: 19%
  • Other (vacant land, utilities, etc): 1.9%

    The ordinance exempts certain transfers from the ULA Tax. Transfers to non-profit entities, Community Land Trusts, and Limited-Equity Housing Cooperatives are exempt, as these are the types of transactions the City is intending to encourage.

    On December 21, 2022, the Howard Jarvis Taxpayers Association and the Apartment Association of Greater Los Angeles brought suit in state court challenging the validity of the ULA Tax. Plaintiffs argue that the ULA Tax is a “specific tax” prohibited by the California Constitution on the grounds that ULA Tax revenue must be used for specific purposes. The litigation is currently pending.

    Above data from An Analysis of Measure ULA, by UCLA Lewis Center.

    Available Property

    City of Commerce 35,750 SF Building

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    For Sale: Great industrial concrete warehouse and manufacturing building available for a buyer to purchase. 35,750 square feet of building including roll down security shutters on all windows and 600 amps of 480 volt power. The City of Commerce in recent months passed an ordinance legalizing several types of cannabis operations in the city including cultivation (growing), manufacturing, and distribution. Don’t miss this opportunity. Whether you have applied for a cannabis permit or are simply a real estate investor wishing to lease to the industry, get in before everybody finds out about the recent allowance of marijuana operations in this city.  Contact us for a brochure on this property.

    Note

    1031 Tax-Deferred Exchange Options

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    There is a common misconception that all tax-deferred exchanges are complicated and require all properties, relinquished and replacement, to close concurrently. Fortunately, the most common exchange variation, the delayed exchange (also referred to as a deferred or “Starker” exchange, Starker v. U.S., 602 F.2d 1341), provides Exchangers with more flexibility and options in acquiring the replacement property than the simultaneous exchange. The delayed exchange begins when the Exchanger’s first relinquished property is sold and is completed when the last replacement property is acquired within the prescribed exchange period. To provide the required notice to the relinquished property buyer(s) and the replacement property seller(s) the Purchase and Sale Contract for each property should include an “exchange cooperation”.

    The standard industrial / commercial real estate purchase agreement that we use in our sale transactions in Los Angeles County has standard 1031 Exchange language. This would apply to all commercial real estate types such as retail, office, industrial, or multi-family apartment buildings.

    The use of a Qualified Intermediary (also known as an “Accommodator” or “Facilitator”) is the most common method used to complete a valid delayed exchange quickly and easily. The Qualified Intermediary is an independent party to the exchange transaction, who performs the function of creating the reciprocal trade of properties for the exchange, holds the exchange funds and supplies the necessary exchange documents, such as the Exchange Agreement, Assignments and Closing Instructions. The Exchanger assigns the rights in the Sale Contract for the relinquished property and in the Purchase Contract for the replacement property to the Qualified Intermediary, who essentially becomes the “seller” of the relinquished property and the “buyer” of the replacement property. To avoid actual or constructive receipt of the exchange funds by the Exchanger the proceeds from the sale of the relinquished property are held by the Qualified Intermediary until they are needed for the acquisition of the replacement property. In both simultaneous and delayed exchanges in which a Qualified Intermediary is used to create the reciprocal exchange of properties the IRS allows “direct deeding” of the relinquished property from the Exchanger to the buyer and of the replacement property from the seller to the Exchanger, thereby avoiding the necessity of the Qualified Intermediary holding title to any property. Revenue Procedure 90-34, 1990-1 C.B. 552. Direct deeding avoids the assessment of double state, county, or local documentary transfer taxes and any liability on the part of the Qualified Intermediary for environmental hazards that may exist on the property.

    The Treasury Department issued Regulations in 1991 that clarified the acceptable methods to properly identify replacement property. See Treas. Regs. §1.1031(k)-1(b)-(e). First, the Exchanger must receive all replacement property within the earlier of 180 days after the date on which the Exchanger transferred the first relinquished property, or the due date (including extensions) for the Exchanger’s tax return for the tax year in which the transfer of the first relinquished property occurs. Second, the Exchanger must identify the replacement property to be acquired by the end of the Exchange Period within 45 days of the transfer of the first relinquished property. These time periods are very strict and cannot be extended even if the 45th day or 180th day falls on a Saturday, Sunday or legal holiday. The proper identification of replacement property is critical and if not made in a timely manner the exchange fails and the entire transaction is taxable. The rules are as follows: (a) the replacement property identification must be in writing and signed by the Exchanger, (b) it must be delivered by mail, fax or hand delivery to a party to the exchange transaction (usually the Qualified Intermediary) by midnight of the 45th day, (c) the replacement properties must be unambiguously described, such as by a street address, tax lot number, legal description or the like, and (d) the Exchanger may list up to three properties of unlimited value, but if more than three properties are listed, their total aggregate fair market value may not exceed 200% of the aggregate fair market value of the relinquished property. It is essential in a delayed exchange to adhere to these rules and deadlines established for identifying and acquiring the replacement property. Failure to comply with these rules may result in a failed exchange.