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Shortfall Insurance (“SI”) protects lenders in commercial real estate financings from a loss resulting from property damage of 75% or greater of the replacement cost value of a property or a total condemnation. SI takes its name from the fact that it covers the “shortfall” between the outstanding loan amount and the combined value of the underlying property insurance proceeds and the land that collateralizes the loan in a covered casualty event. In a total taking event, the “shortfall” between the outstanding loan balance and the condemnation award is covered.
SI provides advantages to commercial real estate owners, developers and lenders by enhancing commercial real estate financings.
- Lenders use SI to protect against losses to individual loans. Coverage can also be written on a static portfolio basis.
- Owners and developers use SI to enhance the ability to complete financings and to reduce borrowing costs.
How does SI work for a casualty? SI is put in place with the payment of a single premium at the inception of the financing. If the property suffers a loss from a peril not otherwise excluded that is equal to or greater than 75% of the replacement cost value of the insured building or buildings as determined at the time of the loss, the insurance company will pay the lender an amount equal to the outstanding principal balance of its loan less: (i) the amount of the underlying property insurance proceeds; and (ii) the value of the land as appraised at the time of the loss. The lender retains its lien on the property and can exercise its rights and remedies against the property to collect the remaining amount it is owed.
How does SI work for a total condemnation? SI is put in place with the payment of a single premium at the inception of the financing. In the event of a total taking, the insurance company will pay the lender an amount equal to the outstanding principal balance of its loan less the full value of the condemnation award.
The target customers for SI include lenders, real estate owners and developers, investment and mortgage bankers, and professional services entities like law firms and accounting firms.
SI is available for most commercial real estate property types including: office, retail, industrial, medical, multi-family and parking garages. Specialty properties are considered on a case by case basis.
CRE Insurance Solutions brokers SI coverage for casualty, condemnation or both.
SI is part of a series of policies designed to help property owners, developers, investors and lenders close critical gaps in insurance protection. Other coverages include: Lease Enhancement Insurance, Residual Value Insurance and Zoning Non-Conformance.