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#2228414 - 01/07/20 07:17 PM Flood Coverage for Loan with Two Properties
Texas Prof Offline
Junior Member
Joined: Sep 2016
Posts: 32
I'm grappling with the amount of flood coverage required on a commercial loan, and am hoping for some guidance from someone more versed in the nuances of flood. Here's the basic scenario:

One loan is secured by two properties, A and B (A is a covered property, B is not).
The outstanding loan principal is $400,000.
Property A has $210,000 of flood insurance, property B has none.
Appraised value of property A is $425,000.

My thought is that since the minimum flood coverage is the lesser of the NFIP max, the outstanding principal, or replacement cost, we should have in place at least $400,000.

I have received a counter argument that the flood insurance is sufficient, using the following calculation as its basis:

Outstanding principal of $400,000
Less land value of prop A ($140,000)
Less 78% value of prop B ($55,000) as CLTV% is 78%
Resulting amount of $205,000 is less than $210,000 flood coverage, so a sufficient amount is in place.

Perhaps I am simply dense, but does the above counter argument make sense, or is $400,000 indeed the required minimum?

Any direction and/or regulatory citations would be welcomed.

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Flood Compliance
#2228419 - 01/07/20 07:30 PM Re: Flood Coverage for Loan with Two Properties Texas Prof
Skittles Offline
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Skittles
Joined: Sep 2002
Posts: 13,963
TN
You use the same calculation as any loan with one property. What is required is the lesser of 1) the loan amount; 2) the maximum flood insurance available; or 3) the value of the improvements (replacement cost or actual cash value).
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#2228422 - 01/07/20 07:39 PM Re: Flood Coverage for Loan with Two Properties Texas Prof
Adam Witmer Offline
Power Poster
Joined: Sep 2010
Posts: 2,612
The counter argument isn't correct as you can't subtract the land value and/or LTV from the loan amount. You are correct that you use the lesser of the three, but I'm not sure you have given us the true insurable value of property A as this is a commercial property - meaning you should use the actual cost value (ACV) to calculate the insurable value. Therefore, if the ACV of the property is less than the loan amount, then you could use that amount instead of the loan amount/$400,000.

Either way, the counter argument isn't correct as it doesn't follow flood rules. And as Skittles said, you use the same calculation regardless of the number of properties.

For calculating the ACV, take a look at FAQ 9 here: https://www.bankersonline.com/sites/default/files/tools/flood_faq_2011_10_17.pdf
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All statements are my opinion, not those of my employer, and should not be taken as legal advice.
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#2228426 - 01/07/20 07:56 PM Re: Flood Coverage for Loan with Two Properties Texas Prof
Texas Prof Offline
Junior Member
Joined: Sep 2016
Posts: 32
Thank you. I very much appreciate the responses you provided.

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