I need some help with structures on leased land (USDA-Forest Service). I see there is an exemption for State owned property but if the borrower owns the structures, can we require flood insurance?

Ownership of the land is not a consideration when it comes to flood insurance. Not only can you, you must. It is all about having a security interest in the building.

(c) Requirement to purchase flood insurance where available—(1) In general. A member bank shall not make, increase, extend, or renew any designated loan unless the building or mobile home and any personal property securing the loan is covered by flood insurance for the term of the loan.

I'm going to tag my question to this thread as it's essentially the same question.

Construction/Permanent loan to finance the building of two large fuel storage tanks, a warehouse and an office building. These improvements will sit a leased land owned by a port authority. We will have a security in these leasehold improvements but not the underlying dirt. Said another way, we will not have a security interest in "improved real estate".

Are flood compliance requirements triggered here? Below is the flood law language which addresses not requiring a security interest in the underlying dirt with respect to mobile home, but does not provide this caveat for non-mobile home buildings. It then further talks about the security interest being "improved real estate" and not necessarily "buildings".

Any response is appreciated... thanks!

Following is what the flood law provides:

Basic Requirement

Flood insurance, either issued through the NFIP or from a private insurance provider, is required for the term of the loan on buildings or mobile homes when an institution makes, increases, extends or renews a designated loan, meaning all three of the following factors are present:

• The loan (commercial or consumer) is secured by improved real estate or a mobile home that is affixed to a permanent foundation (security property);
• The property securing the loan is located or will be located in an SFHA as identified by FEMA; and
• The community in which the property is located participates in the NFIP.

In the case of mobile homes, an institution does not have to obtain a security interest in the underlying real estate in order for a loan secured by a mobile home to be covered by the regulations.

The FDPA provides that a regulated lending institution may not make, increase, extend, or renew any loan secured by improved real property that is located in an SFHA unless the improved real property is covered by the minimum amount of flood insurance required by statute. This includes situations where a security interest in improved real property is taken only “out of an abundance of caution.”

Leave it to the FDIC to put a very poorly written recap in their exam manual, but it is not the law.

Here is the law:

208.25(b)(5) Designated loan means a loan secured by a building or mobile home that is located or to be located in a special flood hazard area in which flood insurance is available under the Act.

208.25(c) Requirement to purchase flood insurance where available—(1) In general. A member bank shall not make, increase, extend, or renew any designated loan unless the building or mobile home and any personal property securing the loan is covered by flood insurance for the term of the loan.

Land ownership is not mentioned at all and does not come into play.

And the following are from the FDIC Rules & Regs.

https://www.fdic.gov/regulations/laws/rules/2000-6100.html#fdic2000part339.2

§ 339.2 Definitions. - Designated loan means a loan secured by a building or mobile home that is located or to be located in a special flood hazard area in which flood insurance is available under the Act.

§ 339.3 Requirement to purchase flood insurance where available.

(a) In general. An FDIC-supervised institution shall not make, increase, extend, or renew any designated loan unless the building or mobile home and any personal property securing the loan is covered by flood insurance for the term of the loan. The amount of insurance must be at least equal to the lesser of the outstanding principal balance of the designated loan or the maximum limit of coverage available for the particular type of property under the Act. Flood insurance coverage under the Act is limited to the building or mobile home and any personal property that secures a loan and not the land itself.

(b) Table funded loans. An FDIC-supervised institution that acquires a loan from a mortgage broker or other entity through table funding shall be considered to be making a loan for the purpose of this part.

[Codified to 12 C.F.R. § 339.3]

Thanks Randy and Dan for your follow up responses.

So based on what you've provided, the underlying dirt is never necessary or required for flood compliance requirements to be triggered. A security interest in the buildings is our focus?

We've never had a loan like this where we didn't take dirt along with the building (outside of mobile homes), so this is rather new to me. When I think of flood compliance, all these years I've always had "improved real estate" in my mind. I've never considered taking a building without the dirt.

Has the question of the underlying dirt been addressed perhaps in an FAQ or any other guidance or do we simply go with the regulatory verbiage which as you've provided clearly just mentions buildings and no reference to the underlying dirt.

Thanks again for your time and help always!

I am not aware of any specific further discussion on the issue. What is more confusing is when you loan on the underlying property when the property owner has allowed for leasehold improvements on the property. Your security interest will attach to the underlying property but not the buildings. If that is the case, then flood insurance would not apply, as you don't have the structures as collateral. It is all about the structures.

Thanks for the quick response Randy. Yeah, I gotcha on that other scenario.

In my scenario though, we will have the buildings and not the dirt. This is a first, but glad I sought input from you folks. My initial thought was we had to have "improved real estate" and not just the buildings. The only exception would be mobile homes as I understood and referenced with the FDIC guidance above which state "improved real estate" as a required factor.

Hard to argue with the plain text of the Reg however which you guys provided which just focuses on "buildings". I may still seek clarification from our examiner for final clarification.

Thanks again for your response!

Randy/Dan, this is a follow up to my question/scenario I posted not that long ago. Last I left off I was going to refer my question to my examiner (FDIC) since we were set anyway for a compliance exam with them. Thanks again for your prior responses.

Prior to relaying the question however, I did refer to the law, the regulation and the supporting guidance provided by the different federal examiners. I still came back to my original conclusion that "improved real estate" was a necessary factor (outside of mobile home) and that taking the building by itself was not the trigger for flood compliance. In other words, with the exception of mobile homes, the underlying dirt needs to accompany the building in your security interest.

This is supported by the law/act itself: https://www.fema.gov/media-library-data/20130726-1748-25045-5315/floodact.pdf

The term "improved real estate" is defined and used throughout while clearly specifying a security interest in "improved real estate"... specifically when introducing the MIRE requirement.

While the regulation itself does not use the term "improved real estate" and instead simply uses the term "building", we are all aware that the purpose of the regulation is to implement the requirements of the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973... and the NFIP and FDPA makes it clear that "improved real estate" is a required factor.

Also while I initially provided the FDIC's compliance guidance on flood which spells out "improved real estate" as a required factor, it appears that the other federal examining agencies are in alignment with this as all provide that "improved real estate" is a required factor:

FDIC (page v-6.2 bottom left): https://www.fdic.gov/regulations/compliance/manual/5/v-6.1.pdf
OCC (pg. 3 bottom): https://www.occ.treas.gov/publications/p...tection-act.pdf
Federal Reserve (page 2): https://www.federalreserve.gov/boarddocs/supmanual/cch/flood.pdf

We just got through our compliance exam which went well. This question was posed and the response provided by our regulator was that my interpretation is correct. They would not see flood compliance requirements being triggered if a building secured our loan without the underlying dirt except in the case of a mobile home. They also further asked how we coded the loan for call report purposes. I really hadn't considered this before they asked but I guess it makes sense. We coded the loan as a 4a rather than 1 (RE) which they pointed out further lets us know it's not secured by real estate much less "improved real estate".

Anyhow, thanks again for your responses Randy and Dan... as I mentioned in an earlier post, all these years I always understood flood compliance being triggered by taking a security interest in "improved real estate", but I never paid attention to the fact that the regulation itself doesn't even mention this term and simply mentions "buildings". This was a revelation to me... but again, while the regulation doesn't use this term, the act itself clearly does throughout and guidance by the FDIC, OCC and Fed reinforce this as a required factor.

Good analysis and references, and good timing. I just started my annual flood insurance audit yesterday. I'll take some time to review these a bit closer but from the following cite I think you have brought some unknown light to the subject. Thanks.

(7) “Federal agency lender” means a Federal agency that makes direct loans secured by improved real estate or a mobile home, to the extent such agency acts in such capacity;

(8) the term “improved real estate” means real estate upon which a building is located;

Yes - thanks Glutes. Interesting info and can't argue.