Finance Your Building's Insurance Premium with an Insurance Premium Financing Loan

Insurance premiums have been rising and coverage shrinking, which poses a huge challenge for boards. Both property and casualty insurance, along with directors and officers insurance, have ballooned with punishing double-digit increases for several years. But unlike other line items in a building’s operating budget, insurance premiums can’t spread out monthly, since the total annual amount has to be paid up front. The good news is that there is a workaround that can lessen the sting.

Condo and co-op boards looking to finance that lump sum cost can take out what’s called an insurance premium financing loan. It’s analogous to a mortgage loan, but from a separate provider. The condo or co-op signs a promissory note — a legally binding, one-year agreement — with the lender where it puts down between 15% and 25% of the annual cost, and the remaining 85% to 75% is put down by the lender. The borrower then pays the lender back over the next nine to 10 months, including interest.

While the interest rates on insurance premium financing loans are higher than that of underlying mortgages, “they’re in the low double digits,” says Michael Feldman,

chief executive officer at Choice New York. “So it’s still an attractive product for any condo or corporation that has short-term cash constraints, as well as boards that just want a steady way to pay property insurance over time.”

Boards, however, don’t have a wide choice when it comes to lenders. “There’s one national lender that everyone seems to turn to,” says Feldman. That, he adds, was the impetus for Choice New York to offer its own product, Property Premium Insurance Financing (PPIF). “Just like other lenders, we pay the annual premium cost upfront,” he says, “but the difference is that we look at interest rate quotes from other lenders and come in at 1% or 2% less.” 

And in some cases, buildings have scored a much better deal. “We have a 138-unit building that had taken out a  $540,000 insurance premium finance loan at a 9% interest rate,” Feldman says. “It came time to renew, and the client’s broker was trying to get them a loan at 16%, almost double what it had been paying. We managed to cut that number in half and offer them a loan that was down to almost 8%.” 

One reason Choice can offer attractive packages is that there’s virtually no risk for the company if borrowers default on their payments. “Let’s say a building pays 25% of the annual premium upfront, which covers four months, and the co-op or condo defaults,” he explains. “We can cancel the loan, which typically takes two to four months, so we’re  not out any money. But we’ve never seen that happen.”

For buildings that aren’t well capitalized and need the money, an insurance premium financing loan “is obviously a complete no-brainer, because you cannot have your building not be properly insured,” Feldman says. “With this kind of loan, you don't have this giant one-time charge, and you can defer the cost at an interest rate that is generally palatable. It’s a way to better manage your cash flow.”

—Paula Chin