Scoured the site to see if this scenario has come up before and I'm not finding anything.

We have a loan secured by a Commercial Co-Op unit. The building is located in an SFHA and we have a lively debate going on as regards Flood coverage requirements. Unfortunately, I have two diverging schools of thought and am not entirely sure which arrow points the right way...

Since the borrower is not eligible to purchase coverage for the building (only the co-op can buy that), would the contents coverage under the General Property form be the only required coverage (required in the mandatory purchase sense)? If so, would the borrower be required to order max limit on Contents coverage in order to get the max extension to Betterments and Improvements? Or since the coverage is not *directly* available to the borrower thru the NFIP (only indirectly) - would none of this be "required" of them (risk, safety & soundness held separately - just focusing on what the federal requirements would be here for insurance servicing).

Salient facts: Business contents do NOT secure the loan (unit is only collateral) and both the value of improvements (unit build out) and loan balance are well over $500,000.

Thanks in advance to the experts!

The commercial condo is eligible for insurance. It is no different than a residential condo, just that the limits are less. So with that said, the commercial condo association has to have insurance on the building under a General Property Form (limit $500,000 for the entire building). The fact that you are lending over $500,000 on one unit in a building that doesn't allow for replacement coverage is a credit risk decision.

Thanks Randy. To level set, the manual only allows for contents coverage to be purchased by the coop unit owner. So if the cooperative fails to provide coverage for the building post-origination, the borrower cannot "cure" that (i.e. he has no option to purchase the coverage for the building).

So what coverage would be force-placed to address mandatory purchase requirements? We cannot purchase building coverage, as we are buying on behalf of the borrower. So at most we can purchase coverage for the unit (which he can't buy through the NFIP...so why are we force placing that?).

We have a "live" scenario right now, so not just a philosophical discussion. The cooperative non-renewed their flood coverage (through non-payment), and we are trying to determine next steps...

Next step. They are default. Call the loan. Let them deal with their condo association.

This is really not your problem and to make a loan like this shows that the credit underwriting team has no knowledge of what the risks were when they originally made the loan. Hopefully the borrower is credit worthy and you might as well move this to an unsecured status. If you release the worthless collateral, then flood is not an issue.