The Federal Emergency Management Agency (FEMA) has developed Flood Insurance Rate Maps (FIRM) for all land in the United States. FIRM are used by surveyors to determine the Flood Zone for all property secured by a CMBS loan, and the Flood Zone is required to be noted on all surveys for a CMBS conduit loan. FIRM display areas that fall inside and outside of the 100-year flood boundary. Areas with structures secured by a CMBS loan that fall outside the 100-year flood boundary are designated Zone C or Zone X on FIRM and properties in those zones do not require flood insurance.
Areas with structures secured by a CMBS conduit loan that fall within the 100-year flood boundary are called Special Flood Hazard Areas (SFHAs). SFHAs are designated as Zone A, AE, AO and AH. Flood insurance is required in order to close a CMBS conduit loan in these areas.
It is important to begin working early with insurance agents for CMBS borrowers with properties located in SFHAs. Agents may not be familiar with the process for obtaining required flood coverage. Obtaining coverage is a two-part process. Part one is to obtain underlying coverage under the National Flood Insurance Program (NFIP) for the maximum amount of $500,000 per building for commercial and multi-family buildings.
Part two is to obtain additional coverage, sometimes referred to as “excess flood,” in an amount equal to sum of (a) the insurable value of the first floor of the improvements located in the SFHA and (b) 12 months of Business Income/Loss of Rents. Insurance agents struggle with this portion of the coverage as few insurers provide this coverage at the levels required for high-value commercial buildings and it takes more time to obtain. The most active insurer for excess flood is Lloyds of London.