Investment Property Insurance - How Important?

As is the case for insurance on your own personal residence, properly insuring your investment property is extremely important.  Protecting this asset with proper coverage is essential and helps ensure your overall investment strategy, doesn’t evaporate through an unforeseen event.

Building insurance generally covers total or partial building loss as to an agreed upon policy amount. Coverage should be sufficient to cover any damage based on relevant estimates of current replacement costs – ie. if $125/ ft. is the current figure to replace a commercial building in the event of a total loss, then that’s the level of coverage you need to have in place.  If you choose to ‘under insure’ by taking out insufficient coverage, you are in reality ‘co-insuring’ the property. In this case, you will be responsible to pay any amounts above and beyond what the insurance coverage provides for.

Landlord’s insurance generally covers loss of income and tenant damage.  Loss of income would be coverage if a property was unfit for rental purposes for a period of time. With respect to Tenant damage issues, it could cover default by the tenant due to vandalism, theft or malicious acts.

There are certainly other specific coverages that you may need for your specific purposes – ie. accidental plate glass breakage, power failures/surges, sewage back-up, to name a few.

Best practice here, is to review your requirements with your commercial insurance broker, making sure you have a comprehensive analysis done on your specific property.  As always, seek out the advice of experienced commercial realtors within your market, as you review your property insurance options.

Property Taxes - About Assessments & Tax Rates (Ontario, Canada Only)

Municipal tax costs on any commercial property are generally significant and a major annual expense.  The tax bill is basically a bi-product of 2 factors:

1. The Current Value Assessment (CVA) of the property

2. The Municipal Tax Rate

Assessments are provided by the Province of Ontario (thru MPAC) and the tax rates are then levied by the local municipality. The Net Tax owing is then determined through a process of straight multiplication. Since the Tax Rate is set by the municipality, it is a part of the formula which for these purposes, I would suggest you have little/or no influence on.  However, you do need to keep an eye on the CVA side, to ensure it is realistic and relevant to the property’s Current Market Value.

With that in mind, there are three specific methods of valuation

1. Income Approach 

2. Comparative Sales Analysis 

3. Cost Approach 

The first 2 are most often used, with the Cost Approach used primarily in cases where there is a lack of data available, for purposes of a proper evaluation/comparison.

In considering the above, it is always a worthwhile exercise to determine how realistic a property’s CVA is, ensuring you are not paying more than your fair share on property taxes. If your analysis determines that the assessment is overstated by 10-20-30%, by all means file an appeal through MPAC. Bear in mind, there are rules and regulations to follow in filing an appeal, and it can be arduously slow - but you can successfully reduce your assessment if the facts clearly support your position (meaning the CVA is overstated).

Just a final note, there are full time tax assessment consultants throughout the province, who specialize in reviewing property assessments and handling appeals.  Absolutely worth at least a discussion, to see how they might be of service.  Also, MPAC is very approachable on matters regarding assessments and their website is an excellent starting point.

As always, seek out the advice of experienced commercial realtors within your market, as you review tax assessment matters on specific investment properties.