Property in a flood zone where there is a commercial structure which is also in the flood zone. The borrower does not own the building. A third party tenant constructed the building and pays a monthly lease obligation for use of the land under a signed agreement. The lender assures me that the commercial structure is not part of our collateral and that the appraisal does support that. Covered?

Your collateral does not include the building. Even if you take an assignment of the leasehold agreement, you still do not have a security interest in the building, just an assignment of the proceeds. Flood insurance would not be required. However, be prepared to explain/argue with auditors and examiners that don't understand this concept.

Thank you rlcarey. That is exactly what I told my lender, make sure your documentation is tight on this one. I just wanted to make sure I wasn't missing anything as the dirt underneath the property is my borrower's. Just a side question, I saw where this leasehold agreement came up in terms of flood. Would this be a leasehold agreement situation? I have never heard of such a thing until this morning in the threads.
BOL is awesome by the way

Sometimes the situation is the other way around. The customer is borrowing and pledging the building. The building is on property that the borrower does not own. They have leased (leasehold) the space on the property usually under a long term lease. If you take an interest in the building and the lease, you don't actually have a security interest in the property, as the property remains owned by another party. You only have the security in the lease which gives you the ability to use the property.

Oh - one more thing. If you have a transaction as I described above, only a foolish bank would probably make the loan without flood insurance even if it was not required, because if the building flooded - your collateral would still be gone and it remains at risk for flood.

In your case, unless you are relying totally on the income generated by the lease to the building owner, flood insurance would not be important as the underlying land would still secure your loan. If the income stream is important, then from a safety and soundness perspective, you should write into your loan agreement that the borrower must require their tenant to carry flood insurance.

Wow, some very good points. I learned many new things in just this topic alone. Can I go home now?
Thank you rlcarey!

OK....I need some help wrapping my head around a leasehold agreement transaction and flood.....I've not ever dealt with this....

We have just been presented with this situation.....Lessee is our borrower and leasehold agreement on the land is for 75 years.....borrower is borrowing funds to build a strip mall on the land.....however, borrower is also subleasing 4 parcels of this land.....and already has one sub lessee that we know who will build a convenient store (that will be another loan with whomever the sub lessee chooses)

From what I gather from the discussion above...we do not have to require flood insurance for a leasehold agreement???? But we'd be foolish not to because of safety and soundness reasons? I agree we need that we'd be foolish not to....I just want to understand what the regulation requires in such a situation....

At this point, we would only need to be concerned about the lessee who is our borrower using funds from our loan to build the strip mall....even though we have knowledge that in the near future a convenience store will be on the property...that is altogether a separate transaction that will be evaluated by whatever lender is involved at that point....

Please let me know where I am incorrect....Thanks!

(c) Requirement to purchase flood insurance where available—(1) In general. A member bank shall not make, increase, extend, or renew any designated loan unless the building or mobile home and any personal property securing the loan is covered by flood insurance for the term of the loan.

The building is going to secure your loan whether or not on the borrower property, although I am sure that you are most likely taking an assignment of the lease agreement also. It would be no different than a mobile home in a mobile home park. You are going to have to get insurance on the strip mall and any other building you fund to be built on the property.

Thanks, Randy!

One more question.....it would be $500,000 max for the strip mall as one building....is that correct?

If it is all one building, that would be correct.

Thanks, Randy!