MIAMI—With all the talk of replacement cost levels on insurance policies climbing to an all-time high, how should commercial real estate owners think about coverage? That depends, in part, on the age and location of your asset.

Replacement cost—pure construction cost to rebuild a structure from a clean piece of dirt to full usage—includes the hard and soft costs of new construction. Michael Shadeed, a director of Insurance Services at Franklin Street, tells the older an asset is, the more owners have to look at to make insurance requirements are correct.

“Lenders are going to ask for Law and Ordinance coverage, which also drives up the price of the insurance premium,” he says. “Increased zoning costs, architectural costs, and demolition of a part of a building that isn’t up to code all fall under Law and Ordinance coverage.”

Shadeed sees this trend is happening across the country, but some states are affect more because of increased costs of construction. He points to another example: Insuring a property in Manhattan would be higher than the same property in Atlanta due to construction costs, regulations and the basis of replacement.

Of course, any larger more populated states are likely more expensive. He say lenders who are savvy enough to do deals in multiple markets use Marshall & Swift, a tool that takes the typical replacement cost of an asset and adds in increased cost per each city or state.

“Rates in certain states are also impacted by natural disaster premiums. When it comes to earthquakes, wind and hail, an increasing percentage of the country is adding on these premiums,” Shadeed says. “If you are buying a property in a part of the country that you are unfamiliar with and you don’t know which natural disasters impact that region, a lender can research and let you know which premiums are required.

“Moving forward I don’t see values declining at all. As more lenders and equity sources begin to hire insurance analysts to review deals as they close, a higher percentage of loans will have values based on the higher end of market replacement cost.”