We have a loan secured by 2 commercial properties, both in flood zones. Total loan balance is $2.3 million. Appraisal for Property A $850,000 Property B $900,000.
R/C Property 1 $200,000 and Property 2 $250,000.
Max NFIP $1M
Am I correct that the total insurance required is $450,000?

yes. $450,000.

Commercial properties are only insurable for ACV. You need to use ACV for each property instead of RCV.

I have been told by my lending dept personnel that appraisers are giving them a hard time regarding supplying actual cash values for commercial buildings.

I have been asked by my lending dept to find out what is the methodology used to calculate actual cash value. I have already told them that its RCV less physical depreciation but they are still having a hard time getting the information from appraisers.

Are any other banks experiencing this?

If your appraisers are not familiar with a cost approach appraisal, you might want to be looking for some new ones. You should be performing your FHD first and if in a SFHA require a cost approach in your engagement letters. USPAP Standard Rule 7-4 requires appraisers to consider and use all approaches to value that are applicable in an appraisal assignment.

Appraisers seem to be notorious about attempting to exclude (there is an actual term for this and I cannot think what it is) cost approaches because it involves more work. This is why requiring it, when needed, as Randy has described, is your best defense in getting it when you actually need it.

Sorry but I need clarification on the following statement:

"You should be performing your FHD first and if in a SFHA require a cost approach in your engagement letters."

Does FHD mean Flood Hazard Determination?

Does SFHA mean Special Flood Hazard Area? If so, are you stating that this should be addressed in our engagement letters with the Appraisers?

I was also informed that cost approach values are not appropriate in our area due to the age of the buildings. Also, there is a lack on land sale information in our area. Is anyone familiar with these arguments as a basis for not using ACV for non residential buildings?

Yes, you are correct on the above translations.

They will feed you that line and use the Departure Rule (that's what I couldn't think of earlier), to leave it out..but irrelevant to market value or not, you need it for flood purposes. That's why it's proactive to pull your determination first and require ACV if it's in a designated zone.

I also don't believe that line of BS because that's the entire purpose of having a depreciation piece. That accounts for the age.

I just spoke to another local bank. They informed me that ordering a cost approach on an appraisal for non residential buildings is not always appropriate. They reiterated the arguement that Appraisers will not use cost approach because of the age of the building.

When they request an appraisal for a non residential building they request cost approach or insurable value. They informed me that insurable value is equivalent to RCV.

They also informed me that Appraisers have stated that ACV is not to be used for insurance calcuation.

All that being said, how are other banks addressing this?

You might be better off talking directly to the appraisers on your approved appraisal list rather than other institutions. Ask them in situations in which involve a building in a flood zone, you would like to either have a cost approach or insurable value included with such appraisal. I'm sure they would be willing to work with you. If not, find some other appraisers. If you have a couple of appraisers that will work with you - just give them the few loans that you might do in a SFHA to them.

Or, just go with the insured values from the other hazard insurance on the properties.

I think you are making this way too hard.

When you refer to insured value from other hazard insurance are you referring to the hazard insurance coverage amount or RCV on a hazard insurance policy?

Insurable value is the amount on which flood insurance will pay, that would be ACV on other structures or RCV on primary residences.

My assumption is the insurance agent can not issue a policy unless they use the appropriate value to determine the insurable value. So for example, on non residential buildings the agents will issue the policy at ACV and therefore the hazard insurance coverage will be for that amount.

I can then instruct my lending dept that when we are using the hazard insurance to help us calculate flood insurance coverage all they need to do is check the hazard insurance coverage amount. Is this correct?

"So for example, on non residential buildings the agents will issue the policy at ACV and therefore the hazard insurance coverage will be for that amount."

That may or may not be true. Other hazard insurance is a whole other animal and most likely RCV coverage may be available on non-primary residences. You need to determine what the other hazard insurance is based on and make appropraite adjustments as available. The other option is to allow the flood insurance agent to make an assessment and as long as it appears reasonable, there should be no problems. People make this out as a huge deal, but there is more than one way to skin a cat.

They addressed this in the interagency Q&A #9 on 10/17/11:

In calculating the amount of insurance to
require, the lender and borrower (either by
themselves or in consultation with the flood
insurance provider or other appropriate
professional) may choose from a variety of
approaches or methods to establish the
insurable value. They may use an appraisal
based on a cost-value (not market-value)
approach, a construction-cost calculation, the
insurable value used in a hazard insurance
policy (recognizing that the insurable value
for flood insurance purposes may differ from
the coverage provided by the hazard
insurance and that adjustments may be
necessary; for example, most hazard policies
do not cover foundations), or any other
reasonable approach, so long as it can be
supported.

OK, Thanks.