What insurance do I need during apartment building lease-up?
During lease-up, the vacancy clause can reduce coverage. You may need a vacancy permit endorsement, and your loss of rents coverage should reflect projected stabilized income.
The lease-up period for a new or repositioned apartment building creates specific insurance challenges. The most immediate concern is the vacancy clause in the commercial property policy (ISO CP 00 90), which reduces coverage by 15% for most perils and eliminates coverage for vandalism, sprinkler leakage, and building glass breakage when the building is less than 31% occupied for more than 60 consecutive days.
During lease-up, apartment owners should obtain a vacancy permit endorsement from their insurer, which modifies or waives the vacancy clause for a specified period, typically 6 to 12 months. This endorsement maintains full coverage during the period when occupancy is building from zero to stabilization. Some insurers charge an additional premium of 10% to 25% for the vacancy permit, while others include it at no charge if the lease-up timeline is reasonable.
Loss of rents coverage should be structured to reflect projected stabilized income, not current income. If a covered loss occurs during lease-up and delays the owner's ability to lease units, the business income loss is measured by the income the property would have generated had the loss not occurred. Fannie Mae's Multifamily Selling and Servicing Guide requires loss of rents coverage equal to 12 months of projected gross income, which means the coverage amount should be based on the underwritten pro forma, not current collections. Builders risk coverage should be maintained until the certificate of occupancy is issued and all construction punch-list items are complete, even if some units have begun leasing during the tail end of construction.