Flood Insurance for Loan Secured by Two Commercial Properties
Issue/Question
The Bank is making a loan in the amount of $3,700,000 to be secured by a hotel and restaurant located on one lot. The hotel has a value of $4,900,000 and the restaurant is worth $3,400,000. The Special Flood Hazard Determination Form indicates that the lot is located in zone AE, a special flood hazard area. Should the Bank require one policy in the maximum amount of $500,000, or two policies insuring each building separately in the amount of $500,000?
Response Summary
The Bank must obtain separate policies for the buildings, or one policy listing both buildings, covering each building up to the maximum amount of insurance available of $500,000, since this is the lesser of the insurable value of the buildings or the amount of the loan.
Response Detail
Under the flood rules, the amount of flood insurance required for a loan secured by two commercial properties must be at least equal to the lesser of:
- The outstanding principal balance of the loan
- The maximum amount of insurance available under the National Flood Insurance Program (“NFIP”) [12 CFR §339.3]
If the real estate collateral consists of more than one building located in an SFHA in a participating community, a financial institution must determine the amount of insurance required on each building and add these individual amounts together. The total amount of required flood insurance is the lesser of:
- The outstanding principal balance of the loans
- The maximum amount of insurance available under the NFIP, which is the lesser of:
o The maximum amount available for the type of structures
o The “insurable value” of the structures
The insurable value of the structure, including foundation and supporting structures, is the value of the property less the value of the land. It may be further broken down into:
- Replacement Cost Value (“RCV”) for condominiums and primary residences
- Actual Cost Value (“ACV”) for commercial buildings, which is the replacement cost value of the building less depreciation
The maximum amount of coverage available for a commercial building is $500,000. For non-residential properties, FEMA will require the financial institution to have a separate policy for each building or one policy listing both buildings but insuring each one up to the maximum amount [Loans in Areas Having Special Flood Hazards: Interagency Questions and Answers Regarding Flood Insurance (“Interagency Q&A”), Q.14; FDIC Compliance Manual, V-6.4].
For the purposes of this analysis, we’ll assume that the values given for the restaurant and hotel are the ACV for the buildings:
- Amount of loans: $3,700,000
- Restaurant – Insurable Value: $3,400,000
- Hotel – Insurable Value: $4,900,000
- Total Insurable Value: $8,300,000
- Flood Insurance Available (Restaurant): $500,000
- Flood Insurance Available (Hotel): $500,000
- Maximum Amount of Flood Insurance Available: $1,000,000
The Bank must obtain separate flood insurance policies for each property (or one policy listing both properties), covering each property to the limit for commercial properties of $500,000 (or a total of $1,000,000), since this is the lesser of the insurable value of the properties and the amount of the loan.