By Michael Shadeed
On Oct. 1, the Federal Emergency Management Agency (FEMA) implemented steep rate increases to the National Flood Insurance Program (NFIP) as a result of lowering government subsidies within the program due to the catastrophic losses incurred with Hurricane Katrina and Super Storm Sandy. Now real estate owners and operators will have to pay for flood coverage without subsidies, making rates skyrocket for certain geographic locations.
The Biggert-Waters Act
The change is a result of the Biggert-Waters Flood Insurance Reform Act of 2012, which was signed last year to extend the NFIP for five years. The act requires changes to all major components of the program, including flood insurance, flood hazard mapping, grants and the management of floodplains. The changes are an attempt to raise NFIP premiums to more accurately reflect the “true cost” of flood insurance.
The impact on flood maps and real estate owners
The largest impact of the act will be the new flood maps and re-rating of current policies, which may cause substantial increases in premiums for both commercial and residential assets. Approximately 20 percent of NFIP policyholders pay subsidized rates and will be affected immediately, regardless of changes in the flood mapping.
The most severe flood zones will have subsidies removed first and will see the most severe increases. Coastal areas in Mississippi, Louisiana and Florida will be devastated by the increases. In fact, Mississippi’s legislature has called these rate changes “crippling” and filed an injunction against FEMA at the end of last week.
Coastal homeowners and commercial owners will be hit hard, with many owners in jeopardy of losing their homes or properties due to an inability to pay the increased flood premiums and their mortgages.
Pre-FIRM Buildings
The most impactful increases will be for assets built before 1975, the year the Flood Insurance Rate Map (FIRM) was created. All subsidies will be removed from NFIP pricing, resulting in increases as high as 3,000 percent on some premiums.
Newly purchased or refinanced pre-FIRM buildings will immediately be placed in the new pricing with no subsidies, while older policies will see a 25 percent per year increase until they reach the full premium amount.
Elevation Certificates
All buildings will now be required to have elevation certificates to purchase any form of flood coverage. An elevation certificate is given to every building built post-FIRM and proves to the lender that the building was built at, or above, the current flood insurance height requirements. Underwriters review elevation certificates to assess pricing. As of now, some carriers will issue policies without elevation certificates, but it’s inconsistent.
Once all of these changes hit, lenders will review assets to determine if they are in a newly created flood zone and require flood insurance. This will severely affect the NOI of commercial assets. Commercial owners will be required to increase rents immediately in order to maintain NOI values or risk losing value on their asset.
Advice
Owners looking to sell their properties should hold on to their assets and implement rent increases and operating expense reductions to prove their properties are able to maintain their values even with significant insurance premiums.
To battle these increases, you can consult a flood elevation expert and a local engineer. Also, have your insurance broker negotiate with your lender to try and lower loan requirements on your behalf and have them look for other ways to lessen the premium increase.
— Michael Shadeed is a director of Franklin Street Insurance Services. Shadeed specializes in all product types within the real estate industry, including apartments, office, industrial, retail and hotels. He currently sits on the Young Agent’s Committee board for the Independent Insurance Agents of Georgia and is co-chair of its political fundraising committee.