Insurance

Insurance shows up twice in a housing budget. During construction, builder’s risk and liability coverage are soft costs that must be financed like everything else. After opening, property and liability insurance become a permanent operating expense that lenders require and that rent must cover every month. Because premiums are set by risk, a building’s location, construction type and claims history all feed into its rent.

Insurance is also one of the few operating costs that can change sharply between one year and the next, with no change in the building itself. Articles in this section explain how premiums are priced, how they enter the pro forma, and what a given change in premium means in dollars per unit per month.

That volatility matters more than its share of the budget suggests. A rent is set once and holds for a year; a premium can be repriced at renewal and passed on only at the next lease. Where premiums rise faster than rents, the gap comes out of the return, and projects that were feasible when they were underwritten stop being feasible before they open. Insurance is also the clearest case of a cost that responds to risk rather than to policy, which makes it a useful test of how much of a rent number a city can actually control.

• How much of a monthly rent is insurance?
• What happens to rent when premiums rise?
• Why do construction type and location change what a building pays?