Do I have a Vacant Building?


Having worked in the insurance industry with real estate owners for nearly a decade, there are a lot of questions that come up. In that time frame you hear a lot of questions. One of the most common questions and misunderstandings I have seen is around the issue of vacancy.

In most cases, investors think of vacancy as just that, a building that has no tenancy whatsoever. But is that really the case? In short, the answer is no. Let me explain why.

What is or isn’t Vacancy?

There are many forms of vacancy. In some cases, it is an investor buying a new building with the plan to rehab it. That is vacant building sitting until the project begins. In other cases, it is a landlord who is emptying out his building with the plan of making improvements before refilling the building. These are both common forms of vacancy.

In both cases the key item to be addressed is occupancy percentage. When it comes to insurance, this is the key to determining occupancy. Most insurance policies define a building as vacant or occupied based on the occupancy percentage. This is something that can be seen clearly carrier to carrier. In some cases, they want to see 80% occupancy, in others they are ok with 70% occupancy. These are the most common. A few carriers will event go as low as 50% occupancy. This relates to new purchases. But what about existing buildings?

Many times, you could have a building that is 100% occupied but as tenants move out, you do not have tenants replacing that space. What happens then? The most important thing to look for is the vacancy clause in your insurance policy. All policies have a vacancy clause. It is common for them to have wording such as “a building is vacant unless at least 31% of it’s total square footage is rented or subleased to others or is used by the building owner to conduct customary operations”.

So where does this leave you?

Here are some common questions I’ve heard:

  • I have a building that is 40% leased. Am I vacant?
  • I just completed a rehab and we are in the process of leasing it up. Am I considered vacant?
  • I had a building that was 90% occupied but several tenants did not renew their leases so now I am down to 20%. We are working to lease up the rest of the building. Am I considered vacant?

The answer to all of these is yes.

So what do you do now?

Communicate with your insurance broker on the status of your buildings. Make sure your broker is advising you on how vacancy clauses can impact your coverage. You never want to be stuck in a situation where you think you are covered, and vacancy clauses can limit your coverage if there is a claim.

If you have questions about vacancy or vacancy clauses and want to have a conversation, the team at Crum-Halsted Chicago is always here to help.


by Greg Jones