Liability and Property & Casualty Insurance Coverage Requirements
Special Purpose Entity Formation
When you retain Exeter Reverse 1031 Exchange Services, LLC to administer your Reverse and/or Build-To-Suit 1031 Exchange transaction, a special purpose entity ("SPE") in the form of a single member limited liability company ("SMLLC") will be formed by Exeter Reverse 1031 Exchange Services, LLC exclusively for your transaction.
The sole purpose of this SPE will be to function and serve as your Exchange Accommodation Titleholder ("EAT") that will acquire and hold or "park" title to either your relinquished or like-kind replacement property until your relinquished property can be sold.
Exeter Reverse 1031 Exchange Services, LLC and this newly formed SPE that will serve as your Exchange Accommodation Titleholder will hold title to the designated property ("parked property") for up to 180 calendar days. The simple fact that the SPE is holding legal title to parked property as the EAT exposes Exeter Reverse 1031 Exchange Services, LLC and the EAT to potential risk and liability as the legal title holder.
In order to protect Exeter Reverse 1031 Exchange Services, LLC and the SPE serving as the EAT, very specific liability and property and casualty insurance coverage is required to be paid in full and in place before any Reverse 1031 Exchange transaction can close. In addition, the evidence of insurance coverage such as an insurance binder must be reviewed and approved by Exeter Reverse 1031 Exchange Services, LLC prior to the actual closing.
Exeter Reverse 1031 Exchange Services, LLC and the SPE serving as the EAT therefore have an insurable interest in the property and must be protected before any closing can occur. Evidence that Exeter Reverse 1031 Exchange Services, LLC and the SPE serving as the EAT have been listed as the primary insured on the required insurance coverage must be approved by Exeter and in place prior to any closing.
In addition, you would be listed as an additional insured on any insurance policy because you have an insurable interest in the property as well.
Required Insurance Coverage
The amount of liability and/or property and casualty insurance coverage required by Exeter Reverse 1031 Exchange Services, LLC in any specific reverse or improvement tax-deferred exchange may vary based on the risk assessment of potential liability. However, the following guidelines can be used as an estimate for your insurance requirements.
Property and Casualty Insurance
Property and casualty insurance coverage naming Exeter Reverse 1031 Exchange Services, LLC and the SPE serving as the EAT as the insured must be obtained prior to the closing. The insurance must cover any loss or damage to the property, including any and all improvements thereto, in a coverage amount equal to its replacement cost. The deductible can not exceed a reasonable and prudent amount.
General Liability Insurance
Commercial liability insurance coverage naming Exeter Reverse 1031 Exchange Services, LLC and the SPE serving as the EAT as the insured must be obtained prior to the closing. The insurance coverage must cover liability for death, bodily injury and property damage resulting from the use, occupancy, possession and maintenance of the investment property. The minimum commercial liability insurance coverage requirements are (1) $500,000 for single family residential properties (SFR), condominiums, and duplexes, and (2) $1,000,000 for residential property, multi-family properties in excess of two (2) units, and (3) $2,000,000 for commercial, industrial, retail, office and land with a fair market value of less than $5,000,000, and $5,000,000 for any and all other commercial properties. The deductible can not exceed a reasonable and prudent amount.
Course of Construction Insurance
Course of construction or builders risk insurance must be in place prior to any construction being performed on the property being parked by the SPE serving as the EAT. The amount of coverage will be determined by the EAT after reviewing the extent and scope of any planned improvements.
Workers Compensation Insurance
Proof of workers compensation insurance is required prior to any employee of, or any agent of, any developer, contractor or builder commencing construction on the parked property, or any other service provider beginning any work on the subject property.
Primary versus Excess Insurance Coverage
The evidence of insurance must indicate that it is primary insurance and that any other insurance coverage maintain shall be considered to be excess coverage.
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