[Kathy]

Collateral on the loan is a ranch. A couple of the buildings on the farmstead portion of the property are in a flood zone, including a house and an old barn. The barn is not used for personal family or household purposes. According to the borrower it’s not used at all, isn’t worth anything, and should be torn down but he just hasn’t gotten around to it yet.
I do believe this building needs to have flood insurance on it (or he needs to knock it down). I am trying to decide what the amount of coverage to suggest to the lender. Demolition cost? What would you suggest?

[kmeade]

Following

[Kathy]

Bump

[rcooper]

I agree – if the building is there you’ll need flood insurance. And based on the situation you have described demolition value sounds reasonable.

I recommend reading through Q&A 9 from 2011 and Q&A Amount 2 proposed 2020 (both linked below) that might help you decide on what approach you’d like to take to make sure you’re using the correct insurable value. Here’s what to consider…. In 2009 there was a proposed Q&A 10 that specifially discussed using demolition value or functional building cost on certain non-residential properties. That proposed Q&A, and any specific mention of demolition value, was elimiated in 2011 and somewhat enveloped into Q&A 9 of the 2011 Q&A which says you can use any reasonable approach that can be supported:

in calculating the required amount of
insurance, the lender and borrower
(either by themselves or in consultation
with the flood insurance provider or
other appropriate professional) may
choose from a variety of approaches or
methods to establish a reasonable
valuation. They may use an appraisal
based on a cost-value (not market-value)
approach, a construction-cost
calculation, the insurable value used in
a hazard insurance policy (recognizing
that the insurable value for flood
insurance purposes may differ from the
coverage provided by the hazard
insurance and that adjustments may be
necessary; for example, most hazard
policies do not cover foundations), or
any other reasonable approach, so long
as it can be supported.

2011 Q&A: See 2011 Interagency Q&A, specifically 64177-78. The agencies said the discussion of using demolition value in Q&A 10 (2009) was unnecessary because Q&A 9 (2011) said you can use any reasonable approach that can be supported.

2020 Proposed Revisions to Q&As: The agencies have proposed revisions to the Q&As as well, but there is not change to the substance of Q&A 9 (from 2011), but it proposed to be renumber as “Amount 2”. You can still use any reasonable approach that can be supported.

Let us know if you need more information.

[Author]

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