Many operating companies have a structure similar to the one described as follows: a holding company owns land and building, which is rented by a related operating company. The operating company makes monthly payments to the holding company. This structure is typically used in order to separate the investment assets (land and building) from the operations for many reasons including: unknown liability concerns and future sale structuring standpoint.
A fire, water damage or other disaster occurs, which results in the office being temporarily or permanently closed.
What insurance needs to be in place to specifically cover the intercompany rent payments to the holding company?
It is important to ensure that the holding company and operating company are both named insureds on the same policy, which allows the ability to purchase ‘Loss of Rents or Rental Income’ coverage. This will provide coverage for rental payments between the two companies, should an insured loss occur.
Are there stipulations regarding this intercompany rent situation that the rent must be at fair market value?
Based on discussion with professionals within the insurance industry, there does not appear to be a fair market value (FMV) clause on commercial insurance policies. However, from a tax deductibility perspective, the intercompany rental payments should be at FMV. Also, it is important to review the clauses specific to your policy to determine if any restrictions are stated, and if so, ensure that the rental agreement between the holding company and operating company are on side.
The insured must have the accounting records from the past year (12 months) or longer to prove the loss. In addition, the insured must have policy limits that reflect 100% of the rental value being paid between companies.
Should you require more information, or wish to discuss your specific situation, please contact us at firstname.lastname@example.org
Article contributed by Rochelle McNaughton, CPA, CA