Flood Coverage for Non-residential Condo Unit

Hello
I was hoping for some advice, I'm hitting some brick walls.
We have the following scenario --
6 unit low rise non-residential condo unit building in flood zone.
Borrower owns one unit. This is a professional building housing 6 doctors offices.
Contents only coverage is available for the unit itself. Building coverage may not be purchased in the name of the unit owner.
1. what coverage amount should we require?
2. do we even have to require it?
We have called NFIP and am being left with the impression, contents only coverage is not required but available. It's up the bank to determine if it is and how much to require.
Our potential borrower has a tenant in the space and does not have any contents in the unit to insure.
I don't want us to be out of compliance by not having coverage.
Thank you for your guidance.

You need the association's policy, just like a residential condo policy, except the policy limit is going to be $500,000 for the entire building.

Non-residential condominium buildings and their commonly owned contents may be insured in the name of the association under the General Property Form. The “non-residential” limits apply.

Thank you...

So I'm being told the there is no association and they don't have flood insurance, supposedly paid cash for the building...So I'm saying no dice on the loan request without it.

If they were to obtain it at the association/building level, our potential loan exposure for the unit itself is $400,000, Are we calculating coverage amounts the same?
Taking the lesser of -- dividing association building/contents coverage amounts by the 6 units and subtracting from our loan amount, that would be our contents only coverage amount for the unit or the max contents coverage of $500,000?

First question is - how is it a condo without a condo association? Not possible.

Unless you are actually taking contents as collateral, which sound like you are not as the contents would belong to the tenant, content coverage would be worthless and not required.

So you a left with requiring a policy on the building for $500,000 and then deciding if that sufficiently mitigates the flood risk presented based on the strength of the borrower if the entire building becomes a total loss with only $500,000 in flood coverage.

Thanks again for your help.

Well our Commercial Lender feels that no insurance is needed since only a corner of the building is in a flood zone.
Our Loan Admin folks think the $500,000 isn't enough.

It's been asking more and more questions to go deeper. These folks just don't want to carry flood insurance. We aren't the first bank to tell them no and am sure won't be the last.
Turns out they currently have unsecured personal financing at another bank. Our bank won't do large unsecured loans like that.
We just brought on this commercial lender and his portfolio is mostly doctors/professionals.

If you are looking for the smartest cookie in the batch, IMHO I would go with your Loan Admin folks

^^^^ What Randy said.

I would also watch the new loan officer's portfolio very carefully. These loan officers, the ones that deal with "professional" clients, are the worst ones when it comes to compliance. The majority of them think they and their clients are above the regulations.

As you know, this doesn't fly.

I once had a person tell me they didn't need flood insurance because the unit the borrower was purchasing was on the 3rd floor. I asked them "what happens to the 3rd floor unit when the bottom floor is washed away?"

Should I have asked the Condo Assoc to increase their coverage on the building?
4 units - our loan covers 2 of the units.
Our replacement cost for the 2 units is $300,000
The condo assoc insurance is for $205,000 - all 4 units

Something is amiss.....

How can you have a replacement cost for one or two of the units? You need a replacement cost for the entire building.

my loan is only for two of the 4 units. The appraisal showed a replacement cost for the 2 units as $300,000. I know I cant get the unit owner to have his own flood policy but shouldn't we have required the $500,00 coverage
(from the association) for the building before we closed?

Your appraiser has a hole in his head. You can't determine the replacement cost of a part of a building. Replacement is all or nothing. You don't replace half of the electrical, plumbing, HVAC, etc. Does he give you a replacement cost on one residential condo unit in a building with 175 units in it? It is not possible. What is the replacement cost listed on the NFIP policy.

$620,000

The RCBAP policy should be for the RCV or the number of units times $250,000, whichever is less.

If the association only has $205,000 they are severely underinsured. If there was a loss there would be some hefty penalties since the coverage does not insure at least 80% (this is only for co-insurance penalties the 80% doesn't cover the regulatory requirement).

The following are examples of the co-insurance penalty calculation: (BTW - an individual unit owner's policy does not cover the co-insurance penalty. That is an out of pocket expense.)


Examples
Example #1 (Inadequate Insurance)
Replacement value of the building $250,000
Required amount of insurance $200,000
(80% of replacement value of $250,000)
Actual amount of insurance carried $180,000
Amount of the loss $150,000
Deductible $500

Step 1: 180,000 ÷ 200,000 = .90
(90% of what should be carried.)
Step 2: 150,000 X .90 = 135,000
Step 3: 135,000 - 500 = 134,500

We will pay no more than $134,500. The remaining $15,500 is not covered due to the coinsurance penalty ($15,000) and application of the deductible ($500).

Example #2 (Adequate Insurance)
Replacement value of the building $500,000
Required amount of insurance $400,000
(80% of replacement value of $500,000)
Actual amount of insurance carried $400,000
Amount of the loss $200,000
Deductible $500

In this example there is no coinsurance penalty, because the actual amount of insurance carried meets the required amount. We will pay no more than $199,500 ($200,000 amount of loss minus the $500 deductible).
D. In calculating the full replacement cost of a building:
1. The replacement cost value of any covered building property will be included;
2. The replacement cost value of any building property not covered under this policy will not be included; and
3. Only the replacement cost value of improvements installed by the condominium association will be included.

this is a non-residential - commercial only condo units

I think you have a problem with a replacement cost of $620,000 on the flood policy unless there is a lot of depreciation involved. You should be looking for the ACV of the entire structure.

The collateral is a residential condominium unit in a non-residential condominium building. The association did not renew the NFIP policy with coverage of $500,000, and now the policy is cancelled. The borrower cannot purchase such a policy, what can the borrower do? What is the lender to do, force place?

Force place if you can or have them visit with a private insurer, otherwise your only other option is to call the loan.

Thank you Randy. One more thing, since our collateral is the residential condo unit in a non-residential condo building, the NFIP max would be $250,000. Assume the loan balance & insurable value is over $250,000, we would force place coverage in the amount of $250,000, not $500,000, correct?

Well, under the flood rules, it would be the lesser of the loan amount, the amount of NFIP insurance available ($500,000) or the insurable value of the entire building. I do not think you could just treat this as a single unit residential structure. Plus, even if they purchase private insurance, if the building floods and that specific unit does not actually get damaged, whatever insurance they buy is not going to pay, even if they have to condemn the whole building. You are in a bad situation. If I was you, I would be encouraging your borrower to sue the condo association and force them to insure the complex. They have basically made it impossible for any owner (residential or commercial) to get or maintain a loan on that property.

Thank you for your feedback, Randy.

In reviewing the Interagency Flood Q&A, what is your take on the answer regarding to Condo and CO-OP #9: "...a loan secured by one of these types of units is not a designated loan under the Regulation, and the mandatory flood insurance requirement does not apply."


CONDO AND CO-OP 9. What are the flood insurance requirements for a residential condominium unit or a non-residential condominium unit located in a non-residential condominium building? What are the flood insurance requirements for a non-residential condominium unit located in a residential condominium building?

Coverage is not available under the NFIP for an individual residential condominium unit or a non-residential condominium unit located in a non-residential condominium building. NFIP coverage is also not available for a non-residential condominium unit located in a residential condominium building. Therefore, a loan secured by one of these types of units is not a designated loan under the Regulation, and the mandatory flood insurance requirement does not apply. The Agencies note, however, that contents coverage is available through the NFIP for these types of units.

See NFIP Flood Insurance Manual.

If that is the case, why did you start this conversation with: The association did not renew the NFIP policy with coverage of $500,000, and now the policy is cancelled.

How did they originally have a NFIP policy? But the Q&A is correct and if the building is not eligible for coverage, it is not a designated loan.

I guess I was erroneously concentrating on the fact that you indicated that it was previously insured by the NFIP.

It was understanding a individual residential unit owner in a commercial building could not purchase flood insurance for the building as they do not own the building.

What am i missing?

You are not missing anything - it was an oversight on my part as I was focusing on the fact that they previously had a NFIP policy and not the nature of the building.