FEMA Redraws the Lines: The Biggert-Waters Flood Insurance Reform Act and FEMA’s Flood Mapping Program

Hurricane Katrina. Hurricane Irene. Hurricane Sandy. Over the past several years, these and other super-storms have pummeled coastal communities up and down the East Coast, tearing houses off their foundations, flooding whole towns and destroying miles of coastline. Meteorologists warn that these aren’t freak events, but storms of the future. Not surprising, then, that severe weather was No. 5 on The Counselors of Real Estate’s recent list of “The Top 10 Issues Affecting Real Estate 2013.” Released earlier this month, the list is a study of the most significant complications, obstacles and glitches facing the U.S. commercial real estate industry. The ranking reflects the collective impact that recent storms have had on the country’s coastal areas, rendering them more dangerous and less desirable, lowering property values and fueling intense debate about development and investment in vulnerable regions. The purpose of this brief is to outline FEMA’s response, including a major effort to redraw the nation’s flood maps and redefine areas as high-flood risk.

Biggert-Waters Flood Insurance Reform Act

FEMA---Image.pngTo address the risk, President Obama signed the Biggert-Waters Flood Insurance Reform Act of 2012 into law in July 2012. The bill extends the National Flood Insurance Program (NFIP) for five years (until September 30, 2017). Congress also approved $400 million per year for FEMA to update its flood-mapping program. At the same time, the bill applies long-term changes to major components of the NFIP, including flood insurance, flood hazard mapping, grants and the management of floodplains. Many of these changes come as the costs and consequences of flooding have continued to increase.

Flood Maps and Property Assessments

For a prospective purchaser, a property’s location in a flood zone can have significant implications for property value, price appreciation, potential for damage and higher insurance rates; hence, the project to update FEMA’s mapping system to better address flood risk can have serious implications on the risk associated with properties in certain areas of the country.

Although flood maps are not specifically listed as a required physical source under the ASTM E 1527-13 Phase I ESA standard, environmental professionals may occasionally refer to FEMA flood maps in their Phase I reports (usually as a non-scope client request) for the purposes of assessing business risk (i.e., impacts on insurance requirements, property hazards or restrictions on restrictions on use).

The U.S. Department of Housing and Urban Development (HUD) includes requirements in Chapter 9: Environmental Review of its MAP Guide specifically for assessing a property’s potential for flood risk as a standard part of the agency’s environmental due diligence responsibilities. Specifically, borrowers must check the relevant FEMA floodplain map. Mortgage insurance will not be approved by HUD for:

  1. a property, other than a functionally dependent use, located in a floodway, or
  2. any critical action located in a coastal high hazard area, or
  3. any non-critical action located in a high hazard area, unless the property is a functionally dependent use, or meets other conditions specified in the guide.

HUD also “strongly discourages” any new construction in mapped 100-year floodplains.

Mapping the Risk

FEMA had already started to update its maps before Hurricane Sandy struck. In some areas, the maps contained 30-year-old data. To identify a community’s flood risk, FEMA conducts a Flood Insurance Study. The study includes statistical data for river flow, storm tides, hydrologic/hydraulic analyses, and rainfall and topographic surveys. FEMA uses this data to create the flood hazard maps that outline a community’s different flood risk areas. Floodplains and areas subject to coastal storm surge are shown as high-risk areas or Special Flood Hazard Areas (SFHAs). Some parts of floodplains may experience frequent flooding, while others are only affected by severe storms. Communities directly outside of these high-risk areas may also find themselves at considerable risk. Factors such as shifting weather patterns, erosion and development can affect floodplain boundaries. Flood risk can also change over time, and for many reasons, including new development and environmental changes.

This is why is FEMA allocating funding to update flood hazard maps across the country. These new flood maps, also known as Digital Flood Insurance Rate Maps (DFIRMs) show flood risk at a property-by-property level. Sometimes new maps reveal new or different risks and flood insurance levels. If a property is mapped out of a high-risk area, the owner’s flood insurance costs will likely decrease. If another has been mapped into a high-risk area, the owner will likely have to incur the cost of flood insurance, particularly if the mortgage was obtained through a federally regulated or insured lender.

Flood Maps: A Real Estate Reality Check

As a result of recent storms, once-desirable waterfront properties are less so. Property values have dropped as a result in certain areas, and rebuilding, new building and investment have become topics of contention among lenders, owners and policy makers. Many local governments are planning for potential flooding and weather turbulence in years to come, which could impact investment in infrastructure and development, and even consumer demand for housing.

The new federal flood maps allow property purchasers, owners and lenders to check whether an address is located in a flood zone, and how severe the flooding could be; vulnerability does vary, depending on the type of construction used, whether a building sits on a slight rise and other factors. Far more structures are now in areas where flooding is expected to top three feet, a level that, the agency said, could easily shove a structure off its foundation. In New York City, for example, the new maps double the number of structures now in flood zones. [Click here to determine if a target property is located in an area where flood maps are in the process of being updated.]

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At least 25 percent of businesses that close after events like a flood never reopen so the risk exposure for a commercial property owner can be significant. From 2007 to 2011, the average commercial flood claim was over $75,000. Flood insurance is the best way to protect from devastating financial loss. The new law will likely increase rates overall to reflect the true flood risk associated with residential or commercial properties, and many insurance discounts will be eliminated. For example, premiums for certain non-primary residences in high-risk areas will increase 25 percent per year until they reflect full-risk rates.

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As a result of the FEMA mapping effort, owners of commercial and residential properties may now find themselves within the boundaries expanding flood zones. Lenders should be cognizant of the risks of lending on properties that may be at a higher risk of flooding than once thought. If asked by a client to review FEMA maps during due diligence, environmental professionals should determine whether the area is in the process of having its maps updated and consider the potential implications on the property’s flood risk.