Flood Plain Calculus

Flood Plain Calculus

Let’s get one thing straight right off the bat. I’m not a flood plain expert. One of my partners (whose name rhymes with doghouse – which is usually where I am in his book) knows more about flood insurance than anybody I’ve met. Here are the highlights he has drilled into me, and things I have picked up along the way.

·         FEMA drew its first Flood Insurance Rate Maps (FIRM) in Sioux Falls in 1979. Then redrew in 1982, 2009 and then again in 2011.

·         Fact: More than a few investment/commercial buildings in Sioux Falls are now in the flood plain. When these buildings were built they were not.

·         Section 42 of U.S.C 4012a sets the responsibility to place flood insurance on the applicable lender. In reality this means insurance agents must get a flood insurance policy pre-approved before a lender will close a transaction. (Really this means your commercial real estate broker will frantically make calls to any insurance agent who returns calls to get bids to ball park this number (Yes, it really flows downhill).

·         Basically if a commercial property is in the flood plain and it has debt the federal government requires the lender to force the buyer to buy a flood insurance policy.

Who Cares?

If you are buying a commercial or investment property in Sioux Falls you need to determine if the property is in the flood plain early in due diligence. Properties that currently do not have debt on them, are in the flood plain and currently do not have insurance can be difficult to insure, and perhaps quite costly.

True Story

I sold a half million dollar office building this summer that was in the flood plain. It did not have debt or flood insurance on the property. Quotes ranged from $1,700 to $30,000 a year from various agents in town. We got the deal closed after a diligent agent from Howalt-McDowell took the time to work on the project (Thanks Karen!) and finally got a reasonable quote.

This delayed our transaction and almost killed the deal.

Take Away

You don’t have to be a flood insurance expert while buying your next property, but here are the basics.

• 1.       Determine through your insurance agent if your property is in the flood plain.
• 2.       Get a couple of quotes very early in due diligence.
• 3.       Factor this into your expenses much like property taxes. You can’t avoid it and the annual cost will most likely keep going up.