How Real Estate Funds and Landlords Secure Rent Payments, Even in Cases of Default

Logistics giants like GLP, which operates industrial parks across Brasil, have rent guarantees in place for all of their properties.

According to Cristina of Unioncorp, there aren’t significant differences between rent guarantee insurance for offices and for industrial warehouses. What varies, she notes, are the needs of the property owner, as the properties themselves are quite different.

“There’s no fundamental difference. Typically, industrial assets, being simpler constructions, have owners who prioritize covering rent and related charges, as well as late fees,” she explains.

On the other hand, the concern for industrial park owners is also related to the variety of operations and the value of stored goods, especially sensitive items like chemicals.

“The chemical segment must take out content insurance based on the stored products. The potential risk of the property is assessed during inspections for the purposes of contracting property insurance,” says Rômulo Otoni, GLP’s operations director in Brazil.

In commercial office spaces, the risks differ. In these locations, damages can be costly depending on the tenant’s use and any improvements made to suit their needs. The lower quantity of high-value materials also reduces potential risks.

It’s also important to note that for offices, contracts usually require the property to be returned in the same condition it was delivered at the start of the lease.

The cost that property-owning companies incur for rent guarantee insurance depends directly on the tenant’s risk profile and the lease value, whether in corporate offices or industrial warehouses.

The lower the risk of default, the lower the insurance cost. Conversely, the higher the risk, the higher the policy cost. This also applies to lease values. To determine these parameters, companies like Unioncorp conduct a thorough analysis of the tenant and their ability to cover rent costs and other ancillary coverages included in the contract.

While guarantee fees in the banking sector usually hover around 7%, for rent guarantee insurance, around 1.5%.

In the case of GLP, which did not disclose the amount it spends on insuring its industrial warehouses, tenant default rates don’t exceed 1%—a positive figure for both the logistics company and the insurer. 

Cristina from Unioncorp notes that the frequency of claims in the office segment is lower compared to the residential sector.

“We went through a challenging period during the pandemic when the number of claims increased considerably for obvious reasons, but we’ve seen a recovery. The market has rebalanced and found new ways to restore stability,” she says.

Typically, a rent guarantee insurance claim can be initiated after the second month of tenant default. However, from the first instance of non-payment, the contracting company informs the insurer of the issue.

“When the second month of default is reached, by the time the third month’s payment is due, the insurer settles all overdue amounts with the landlord, including any late fees and interest. From there, after assessing whether the tenant can meet future payments, the insurer may advance the rent to the landlord until the contract expires, the issue is resolved, or the policy limit is reached,” she notes.

In addition to rent guarantee insurance, another form of protection is gaining traction in the market: capitalization bonds for rent guarantees. According to Unioncorp’s CEO, Cristina Caldeira, this option is increasingly attracting companies in the commercial sector.

Cristina explains that the bond is similar to a security deposit. However, unlike what is stipulated in tenancy law, where the deposit is limited to three times the rent amount, in capitalization, this guarantee can cover up to six months.

“In this case, the deposit doesn’t stay with the landlord but is managed by a capitalization company regulated by Susep. The bureaucracy involved in this process is also much less compared to the guarantees required in other contract types,” Cristina adds.