2 loans on a covered piece of RE.

Building 1 - 33,870 SF
Building 2 - 3,500 SF

Balance on 1st loan 330,338.19
Balance on 2nd loan 275,000.00

Total Insurance needed = $605.338.19

Our appraisal from some time back doesn't break down the RCV of the two buildings. How can I calculate required coverage for each building? The smaller building is not given a value by us, or the owner.. it's more or less a tear down situation that isn't torn down. I don't think I can use SF.

Thanks for any insight you can provide.

First, you're not going to use RCV. That's for single unit dwellings that serve as a primary residence. You're going to use ACV (RCV less depreciation).

Bottom line: You need to determine a good faith value for each building. If it's a "tear down situation", demolition value might well be used. Or you might use "functional building cost". Here's some info on these two approaches from our Flood Insurance Training Manual:

Functional or Demolition/Removal Cost:
...in the case of buildings used for ranching, farming, and industrial purposes, insurable value may also be determined by the functional building cost value or the demolition/removal cost value. [Federal Register /Vol. 76, No 200 – page 64178]

A.) Functional Building Cost Value:
...the cost to repair or replace a building with commonly used, less costly construction materials and methods that are functionally equivalent. For example, a farming operation would replace an old dairy barn currently used for storage with a storage building of pole, or some other type of less costly construction found currently in storage buildings.

B.) Demolition/Removal Cost Value:
The lender may calculate the insurable value as the “demolition/ removal cost value” that is the cost to demolish the remaining structure and remove the debris. The ‘‘demolition/ removal cost value’’ may be used when a building is not important to the ongoing nature of the business and as such would not be replaced if damaged or destroyed by a flood.


There's also an article at our website (free) entitled "Flood Insurance Insurable Value" that you can find in the "Lending Tools" box. I think you might find this helpful.
https://store.bankerscompliance.com/

Thanks David,
That helps to clarify some things, and of course (like any good regulation/law) muddies the water for me on others.

I'll talk to the officer and customer and insurance agent and start working our way through this.

Okay, so I went and checked out the Hazard insurance policies which provide an RCV, but not an ACV.
RCV for Building 1 is $500,000
RCV for Building 2 is $50,000

I recognize that you said we should use the ACV rather than the RCV but I'm trying to reconcile this into a number, so bear with me.

If the ACV is $500M and $50M, can we only require $550,000 if it's split as above between the two buildings? It doesn't seem to me that that would be the case, but that's what it seems like when I read though that (much appreciated) article.

So let me try to get this all straight. Correct me if I'm wrong.

You said: Balance on 1st loan 330,338.19 & Balance on 2nd loan 275,000.00. Thus Loan amount = 605,338.19

You need the lesser of these 3:
Loan Amount = 605,338.19
Insurable Value = 500,000 and 50,000 (if that's the ACV)
Max Available = 500,000 each or $1,000,000.

Since the Insurable Value of 500,000 and 50,000 is the lesser amount, that's the amount of insurance you need. Plus, you shouldn't ever insure a building for more than its' insurable value.

Next, you quoted and bolded the MPFIG - which has been rescinded and even before it was rescinded was not the rule/regulation, it was simply a guideline. The Guidelines were wrong when it said "the full insurable value of the building and/or it's contents, which is the same as 100% replacement cost value." That only applies to residential property and even then only in limited circumstances. Refer to the Flood Insurance Manual (page POL 38)

A Dwelling Policy: May pay replacement cost value but only if:

1) Primary dwelling (80% of previous year)
2) “Fully insured” (80% insurance to value), and
3) Single unit dwelling

If these 3 conditions are not met, the policy will pay out ACV.

This is also supported in the Flood FAQs:
However, in cases involving nonresidential properties, and even some residential properties, where the insurance loss payout would normally be based on actual cash value, which is RCV less physical depreciation, 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. [Interagency FAQ #9]

David, thanks so much. That really clears everything up for me.
Your facts as stated above are correct.

As an aside, I quoted the MPFIG as that was in the (free) article you referenced which is why I had included that in the follow up.