Q: We have a $60,000,000 loan on an 800,000 square foot office building in New York City. If we escrow for taxes do we really have to escrow for flood insurance? The borrower has $100,000,000 in flood insurance under an umbrella policy that covers multiple properties. The property owner also has multiple lenders on multiple properties. As long as we are confident that the coverage is in place, why should we have to escrow for such a large amount of voluntary coverage? This property was severely flooded in Sandy, but the building is still standing and the damage is expected to be less than $10,000,000 to repair. The basement and lobby flooded, so there was damage to mechanicals (electric panels, elevator equipment, fuel pumps, etc.) but no damage above the grade level. All 60 floors above grade are fine. Some thought needs to be given to large CBD properties. The prudent measures for homes and commercial properties in low rise areas do not apply in Manhattan.
A: The bank is not required to escrow for flood insurance premiums in this scenario. Currently, the escrow requirement only applies if the loan is secured by residential improved real estate, which has been reiterated in a technical correction made to the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act).
– This Q&A was included in the materials from the FDIC New York Region Regulatory Teleconference: “Flood Insurance – Flood Insurance Compliance and an Examiner’s Perspective” which took place on December 3, 2012. These materials may be found here: https://www.fdic.gov/news/conferences/NY/2012-12-03.html