[Sandy]

We are working on a loan that will be a 2nd mortgage on a RV Park that a has a commercial building (store), and a second building that is a pavilion with storage area that are located in a flood zone. We already require flood insurance on the first mortgage, which was closed about a year ago, for both buildings and the contents of each building because we had filed a UCC. The borrower is requesting $350,000 to do improvements to the property, inside the store, and tear down the old pavilion and build another. If the 2nd mortgage is secured by the property and contents do we have to do an updated list on the contents and possibly require more flood insurance? If we do the 2nd mortgage without the contents as collateral do we have to update the contents list and not worry about increasing flood on the contents? Lastly, we are considering using a different property as collateral and not taking a 2nd on the RV Park. If we don’t take a second on the RV Park do we not have to worry about reassessing the required amount of flood insurance for the 2 buildings and their contents?

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[Sandy]

I wanted to further confirm on the amount of flood insurance required on pavilion with a storage area that I listed in my question in my previous post. If the old one is tore down and replaced and we do a second mortgage on this RV Park how do we determine the updated flood coverage amount required on the pavilion if we don’t do a new appraisal? The other appraisal is approximately a year old. We talked to the original appraiser and he said with the improvements they wanted to do would maybe at the most increase the value of the property by $50,000. Do we need to obtain a construction bid list and that will be the new amount required for flood insurance? Sorry this is such a complicated post. Many variables.

[jholzknecht]

You have insurance on both buildings and the contents. The second building is a pavilion. I envision a covered space with no walls. FEMA generally won’t insure a building unless it is walled and roofed. Since it is insured, apparently it has walls.

If the 2nd mortgage is secured by the buildings and the contents, you must make sure the existing policies are adjusted to provide a sufficient amount of coverage.

If the second mortgage is secured by only the buildings, then presumably the existing contents coverage is sufficient to cover the contents securing the first mortgage loan.

If you don’t take a second mortgage, you don’t need to reevaluate the collateral on the first mortgage unless it is increased, renewed or extended.

If you take the new pavilion as collateral for the second mortgage, the value is determined by appraisal, by using the amount of the hazard insurance as a proxy, or, since it is new construction, you can use the construction cost as the value.

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