What is loss of rents coverage and how does it work?

Loss of rents coverage, also called business income coverage or rental value coverage, compensates apartment owners for the rental income they lose when a covered event makes units uninhabitable. If a fire damages several units and tenants must vacate while repairs are made, this coverage pays the rental income the owner would have collected during the restoration period.

The coverage typically begins after a brief waiting period (often 72 hours) and continues for the time it reasonably takes to repair or rebuild the damaged property, up to a maximum period stated in the policy (commonly 12 months, though longer periods are available). The amount paid is based on the rental income the units would have generated, minus any expenses that do not continue during the vacancy. Fannie Mae's Multifamily Selling and Servicing Guide (Part III, Chapter 6) requires loss of rents coverage equal to at least six months of gross potential rental income for all DUS-financed properties, while Freddie Mac's Multifamily Seller/Servicer Guide (Chapter 58) similarly mandates rental income coverage as a loan condition.

Some policies also include extra expense coverage, which pays for additional costs the owner incurs to expedite repairs or temporarily relocate tenants. This might include the cost of temporary housing for displaced tenants if required by local law. Loss of rents is typically included as part of a commercial property policy or can be added as an endorsement.