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#2200597 - 12/13/18 04:22 PM Flood or No Flood
Sheba Offline
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Sheba
Joined: Mar 2002
Posts: 73
Oz
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.

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Flood Compliance
#2200604 - 12/13/18 04:42 PM Re: Flood or No Flood Sheba
rlcarey Offline
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rlcarey
Joined: Jul 2001
Posts: 78,596
Galveston, TX
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.
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#2200608 - 12/13/18 04:59 PM Re: Flood or No Flood Sheba
burke116 Offline
Platinum Poster
Joined: Jun 2014
Posts: 536
RVA
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.

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#2200612 - 12/13/18 05:30 PM Re: Flood or No Flood burke116
Sheba Offline
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Sheba
Joined: Mar 2002
Posts: 73
Oz
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. .

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#2200613 - 12/13/18 05:32 PM Re: Flood or No Flood Sheba
Adam Witmer Offline
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Joined: Sep 2010
Posts: 2,612
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."
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Adam Witmer, CRCM

All statements are my opinion, not those of my employer, and should not be taken as legal advice.
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#2200633 - 12/13/18 06:50 PM Re: Flood or No Flood Sheba
Dan Persfull Offline
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Dan Persfull
Joined: Aug 2002
Posts: 46,630
Bloomington, IN
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.
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The opinions expressed are mine and they are not to be taken as legal advice.

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#2200642 - 12/13/18 07:10 PM Re: Flood or No Flood Sheba
Adam Witmer Offline
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Joined: Sep 2010
Posts: 2,612
Love it, Dan. wink
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Adam Witmer, CRCM

All statements are my opinion, not those of my employer, and should not be taken as legal advice.
www.compliancecohort.com

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#2200648 - 12/13/18 07:38 PM Re: Flood or No Flood Dan Persfull
Sheba Offline
Member
Sheba
Joined: Mar 2002
Posts: 73
Oz
Love that!! Thanks for all of your help.

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#2200692 - 12/13/18 09:21 PM Re: Flood or No Flood Sheba
RR Joker Offline
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RR Joker
Joined: Nov 2002
Posts: 20,652
The Swamp
I also like the one that goes something like: Even God can't waive flood insurance smile
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My opinion only. Not legal advice.

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#2200809 - 12/14/18 08:04 PM Re: Flood or No Flood Sheba
David Dickinson Offline
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David Dickinson
Joined: Nov 2000
Posts: 18,762
Central City, NE
Quote:
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.

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.
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David Dickinson
http://www.bankerscompliance.com

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