Skip to content
BOL Conferences
Thread Options
#1824126 - 06/17/13 04:38 PM Do we have adequate coverage
dac Offline
100 Club
Joined: Sep 2009
Posts: 234
The bank is doing a loan on a non-residential property and I am trying to determine if the bank has adequate coverage. There are five properties being taken as collateral one of which is in a Flood Zone. AE

Loan amount is $1,200,000
Max building coverage $500,000
Appraised Value is $245,000
Estimate RC is $250,000


How do you determine RC minus depreciation?

Return to Top
Flood Compliance
#1824129 - 06/17/13 04:42 PM Re: Do we have adequate coverage dac
rlcarey Online
10K Club
rlcarey
Joined: Jul 2001
Posts: 83,227
Galveston, TX
From the cost approach that should be the part of a commercial appraisal.
_________________________
The opinions expressed here should not be construed to be those of my employer: PPDocs.com

Return to Top
#1824184 - 06/17/13 06:45 PM Re: Do we have adequate coverage rlcarey
dac Offline
100 Club
Joined: Sep 2009
Posts: 234
OK The appraisal states that income and cost approach were not necessary nor applicable in this situation. The appraiser determined that a "credible" appraisal could be produced using only a Sales Comparison Approach so now I'm really confused.

Return to Top
#1824210 - 06/17/13 07:16 PM Re: Do we have adequate coverage dac
rlcarey Online
10K Club
rlcarey
Joined: Jul 2001
Posts: 83,227
Galveston, TX
Well, that is why most banks pull a flood determination first and if the property is in a flood zone, the bank indicates that a cost approach is a requirement within the appraisal engagement letter. It also sounds like you have a lazy appraiser considering this a $1.2MM loan transaction. Did this appraisal pass appraisal review?
_________________________
The opinions expressed here should not be construed to be those of my employer: PPDocs.com

Return to Top
#1824217 - 06/17/13 07:26 PM Re: Do we have adequate coverage rlcarey
dac Offline
100 Club
Joined: Sep 2009
Posts: 234
We took five properties as collateral. Now what do we do? The appraisal came in at $245,000. The estimated R/C $250,000.

Return to Top
#1824228 - 06/17/13 07:36 PM Re: Do we have adequate coverage dac
rlcarey Online
10K Club
rlcarey
Joined: Jul 2001
Posts: 83,227
Galveston, TX
Refer to Question #9 in the flood Q&A as added as final by the October 17, 2011 Federal Register:

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.

Insurance policies written at RCV may require an insured to pay for coverage that exceeds the amount the NFIP would pay in the event of a loss. Therefore, it is reasonable for lenders, in determining the amount of flood insurance required, to consider the extent of recovery allowed under the NFIP policy for the type of property being insured. This allows the lender to assist the borrower in avoiding situations in which the insured pays for coverage that exceeds the amount the NFIP will pay in the event of a loss. Lenders need to be equally mindful of avoiding situations in which, as a result of insuring at a level below RCV, they underinsure property.
_________________________
The opinions expressed here should not be construed to be those of my employer: PPDocs.com

Return to Top
#1824404 - 06/18/13 01:20 PM Re: Do we have adequate coverage dac
Asperta Offline
New Poster
Joined: Apr 2011
Posts: 11
Are you looking for coverage limits adequate to satisfy lenders' minimum requirements, or to fully recover from a loss?

The estimate from the "cost approach" section of a real estate appraisal may satisfy a lender's requirements, but would likely be inadequate for full recovery.

The "cost approach" is a "new construction" cost estimate, not an estimate of the cost to rebuild after a loss.

For insurance adequate to recover from a loss, and to avoid a coinsurance penalty for a partial loss (ask your insurance agent/broker to explain this), you'll need a "reconstruction" rather than "new construction" estimate.
Your insurance agent/broker should be able to run this for you.

You can Google "reconstruction" + "new construction" + "insurance" and find plenty of write-ups on the difference.

Its a little confusing because real estate and insurance both use the term "replacement cost", but it has different meanings between the sectors.

Return to Top
#1824497 - 06/18/13 03:15 PM Re: Do we have adequate coverage dac
rlcarey Online
10K Club
rlcarey
Joined: Jul 2001
Posts: 83,227
Galveston, TX
Thanks for the input and while everything you said I am sure is spot on, when talking about the minimum requirements placed on financial institutions under the Flood Disaster Protection Act, we probably need to stick with terms as defined by our regulators in order to have some mutual understanding when answering questions.

It is apparent you are an insurance professional and for anyone that is interested in how to calculate full recovery, I would definitely defer to you.
_________________________
The opinions expressed here should not be construed to be those of my employer: PPDocs.com

Return to Top