I have a commercial property with several old storage structures being purchased. The property is in a flood plan. The borrower plans to eventually tear down the buildings and sell the land. This was formerly a car lot. There are no residential structures. Is flood insurance needed in this case? I would say no, but maybe I am not considering everything. Please advise.

a commercial property with several old storage structures

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.

Unless you can carve out those buildings in your security agreement, then they will be required to have flood insurance.

We had a situation like this where one of the buildings securing our loan was in a flood zone, but they were planning on tearing it down. We required the insurance until we had proof that the building was no longer there.

Thanks to both of you for the response. The land value without the building value is more than enough to secure the loan. These storage buildings have not been used in over 5 years and they are falling apart and have very low values. As I have no information about demolition dates I will recommend that we move forward with requiring flood insurance until the buildings can be demolished. I appreciate your help. I think I was looking to future use rather than current condition. .

See flood FAQ 24:

"24. Some borrowers have buildings with limited utility or value and, in many cases, the borrower would not replace them if lost in a flood. Is a lender required to mandate flood insurance for such buildings?

Answer: Yes. Under the Regulation, lenders must require flood insurance on real estate improvements when those improvements are part of the property securing the loan and are located in an SFHA and in a participating community. The lender may consider “carving out” buildings from the security it takes on the loan. However, the lender should fully analyze the risks of this option. In particular, a lender should consider whether it would be able to market the property securing its loan in the event of foreclosure. Additionally, the lender should consider any local zoning issues or other issues that would affect its collateral."

I always remember this quote from Richard Slevin at a seminar many years ago.

If you have a building that will secure the loan located in a SFHA that would fall over if you leaned against it you have 3 choices.

1. Do not make the loan if flood insurance will not be acquired.
2. Have flood insurance in place at the time of loan closing.
3. Lean against the building before you make the loan.

Love it, Dan.

Love that!! Thanks for all of your help.

I also like the one that goes something like: Even God can't waive flood insurance

This thinking is about the bank's exposure. Flood insurance is about protecting the federal government. Check out this quote\:

Require federal financial regulatory agencies to adopt regulations to carry out the requirements of the different flood insurance related Acts. By requiring adequate coverage, [b]the lender also is protecting the Federal Government’s interests by preserving the assets of agencies that insure the lender’s deposits. [/I] [MPFIG – page 29]

You can't net your exposure and then determine the amount of flood insurance. You only look at the buildings that are in SFHA to determine the correct amount.