We have a rather large cml loan. Building is in both flood and nonflood zone. I am being told it is the same building and not separate buildings.How do we determine the amount of flood ins needed? Would it be for the entire loan? (or only the building - if separate buildings - in the zone) If not, do we use an appraisal for the parts in the flood and have them get ins for that part or do we do a percentage?

You should have the lesser of:

Loan Balance,
Amount available, and
Insurable value.

A wise borrower should have the lesser of the amount available and the insurable value. You can require flood insurance even if not is a flood plain. The amount available is set per building.

If any part of the building touches the flood zone (even one corner) the entire building is considered to be in the flood zone and must be insured. You cannot prorate the coverage.

Would be beneficial to include arbitrary amounts in your example to give you an idea of what would be required. Also, it should be understood that flood insurance coverage under the NFIP is limited to the OVERALL value of the property LESS the value of the LAND.

With that said, assume for example that we have a loan secured by improved real estate (3 buildings) with these factors:

-Overall Property Value (OPV): $500,000
-Land Value (LV): $300,000

1. Amount of the loan and current loan balance: $300,000
2. Insurable value (OPV-LV): $200,000
3. Maximum allowable (commercial): $500,000

The amount of flood insurance REQUIRED would be $200,000 (because it's the lesser of the three). In this example the amount of flood insurance required DOES NOT have to be the amount of the loan ($300,000). Just keep in mind that because there are multiple structures (3 buildings) securing the loan, EACH building is required to have flood insurance. This can be achieved by having three seperate policies for each building or one policy with a seperate schedule for each building.

Now assume this example:

-Overall Property Value (OPV): $500,000
-Land Value (LV): 150,000

1. Amount of the loan and current loan balance: $300,000
2. Insurable value (OPV-LV): $350,000
3. Maximum allowable (commercial): $500,000

The amount of flood insurance REQUIRED would be $300,000 (because it's the lesser of the three). In this example the amount of flood insurance required HAS TO BE to be the amount of the loan ($300,000), but only because it's the lesser of the three. Once again though, because there are multiple structures (3 buildings) securing the loan, EACH building is required to have flood insurance.

However keep this in mind. In this example, you could come across this scenario: The TOTAL value of the three buildings is $350,000 which is broken down as Building A ($300,000), Building B ($25,000) and Building C ($25,000). You might assume that only requiring flood insurance for Building A in the amount of $300,000 would satisfy the insurance requirement because it's exactly the same amount of the loan which is the amount of flood insurance required. However, because all three buildings secure the loan, ALL three buildings have to be covered by flood insurance. Therefore, ONLY requiring flood insurance for Building A for $300,000 isn't going to cut it even though it satisfies the total amount of flood insurance required. All the buildings need flood insurance so the $300,000 can either be spread between the three buildings, or the borrower can insure each building up to their insurable amount ($300,000; $25,000, and $25,000). Regardless, EACH building is required to have flood insurance.


Hope this wasn't confusing!

How about an example with a loan balance of $850,000, property consists of four commercial buildings, total appraised value of $1,000,000 and land valued at $225,000?

Is the $500,000 limit per building?

Yes.

It looks as though you would need to have $775,000 in flood insurance split among all 4 buildings.

Thanks Dan and Skittles! Wanted to make sure I was interpreting correctly.