Federal flood insurance reform jolts realty world
A deal on a 12-unit apartment building in Allapattah hit an unexpected roadblock last week, just as Emilio Palomo was getting ready for the closing.
“Although they don’t need flood insurance in that area, the [buyer’s] attorneys called and wanted a quote on flood insurance,” he said.
It was Oct. 2, one day after the Biggert-Waters Flood Insurance Reform Act took effect, raising rates to reflect true flood risks, resulting in hikes in premiums for some policyholders over time and phasing out subsidies on older properties in flood zones, according to the Federal Emergency Management Agency.
But this deal was off Northwest 36th Street and 27th Avenue, not a designated flooding area. And the question of flood insurance typically doesn’t come up for such inland properties that don’t require coverage, said Mr. Palomo, who has been in business since 1971 and is a broker and owner of Riteway Properties.
“When I got the call from the attorney I was surprised because I hadn’t even thought about this,” he said.
Ryan Cassidy, director and agent at Franklin Street Insurance Services, said the new law has caused many similar jolts in the commercial real estate sector in recent weeks.
“It’s kind of hitting everybody by surprise,” he said. “I think there’s going to be a lot of surprised people, to be honest.”
Among them: a property owner whose premium increased by $15,000 for an apartment building. The annual premium now costs about $17,000, up from $2,000. Under the new regulation, owners who had polices in place before July 5, 2012, will see gradual rate increases. In this case, Mr. Cassidy’s client is set to pay 25% more of $15,000 each year until the total premium is at $17,000, he said.
But that won’t be the case if the property changes hands. The new owner would immediately face paying the current premium.
“It basically makes the apartment building unsellable now,” Mr. Cassidy said.
New rates are already taking effect, he said, with the smallest increases at 5% and the average around 10%, but with wide variations depending on zones, elevation and whether properties are pre-firm – built before 1975 – or later.
“There are certain people who are going to get hit very hard,” Mr. Cassidy said. “The message is, get familiar with the new rules. Pretty much everyone with flood insurance is going to be affected. I’m telling my clients expect a 10% to 15% increase in general, but there are going to be specific properties that because they are pre-firm or have certain elevation below the base-flood elevation that will have significant increases.”
Maurice “Moe” Veissi, former president of the Miami and National Realtors associations, said the legislation has added “uncertainty to the market place.” He was in Washington, DC, last week as part of a three-day presidential information committee formed to address industry concerns related to the Biggert-Waters Flood Insurance Reform Act.
“We do know there’s a great deal of information that still has to be ferreted out,” Mr. Veissi said. “We’re not seeing implementations with respect to specific numbers and we’ll need some time, but there are indications that insurance rates will escalate.”
The new act is the most recent extension of the National Flood Insurance Program, which had, among other things, provided subsidized coverage. Analysts say most years the program remained financially viable until catastrophic losses from Hurricane Katrina, followed by several major storms, including Wilma, pushed its losses into the $20 billion range.
Congress debated whether to keep and how to fund the program, extending it more than a dozen times. The 2012 Biggert-Waters Flood Insurance Reform Act, which took effect this month, provides a five-year extension.
“It gave certainty to the marketplace by extending the program for a full five years instead of a few years at a time,” Mr. Veissi said.
But on the other hand, it’s created a new level of anxiety.
“Right now there’s a lot of guessing going on,” Mr. Veissi said, “but the indication is that insurance rates will increase in areas of highest risk.”