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One Building of Self Storage Property is in Flood Zone AE

Sand

Thread Starter
Freshman Member
Joined
Aug 11, 2017
Professional Status
Certified General Appraiser
State
Montana
I am appraising a self storage property and one of the buildings comprising 2,160 SF (13% of total GBA) appears to be in the floodway based on FEMA mapping service website and the city's map server (though the city does not have an engineer to confirm this - small town). FEMA re-mapped the area after this property was constructed. The owner currently does not have flood insurance as it was not required when he got his loan prior to changing the FEMA maps. The city will not allow rebuilding if the building is more than 50% destroyed. Obviously, there appears to be some risk, though the area did not flood in the most recent flood event in the city. Any thoughts on how to handle this? Should there be an adjustment to the value for this situation? It seems like it, but then again how could I quantify it? None of my sales are in a flood zone. Thank you!
 

glenn walker

Elite Member
Joined
Oct 11, 2006
Professional Status
Certified Residential Appraiser
State
California
I am appraising a self storage property and one of the buildings comprising 2,160 SF (13% of total GBA) appears to be in the floodway based on FEMA mapping service website and the city's map server (though the city does not have an engineer to confirm this - small town). FEMA re-mapped the area after this property was constructed. The owner currently does not have flood insurance as it was not required when he got his loan prior to changing the FEMA maps. The city will not allow rebuilding if the building is more than 50% destroyed. Obviously, there appears to be some risk, though the area did not flood in the most recent flood event in the city. Any thoughts on how to handle this? Should there be an adjustment to the value for this situation? It seems like it, but then again how could I quantify it? None of my sales are in a flood zone. Thank you!
Most lenders get flood certifications- FEMA Maps are often wrong and so I would simply report what you know BUT you may be wrong ? So recommend the lender obtain a Flood Certification- They are like insurance companies and are very careful before issuing one. YOU CANNOT make an-adjustment because it's just a guess. FEMA is notoriously bad and in my area they missed an-entire 6 lane freeway. Just repor what you knao and don't make adjustments that you cannot extract with evidence ; ) LOL
 

Sand

Thread Starter
Freshman Member
Joined
Aug 11, 2017
Professional Status
Certified General Appraiser
State
Montana
Glenn - That was my first reaction, too! But then I started to question it. Anyone else?
 

Lee in L.A.

Elite Member
Joined
Jan 24, 2002
Professional Status
Certified Residential Appraiser
State
California
Glenn - That was my first reaction, too! But then I started to question it. Anyone else?
Agree with Glenn. Report what you know and the info source. So if it is wrong, you blame FEMA.
 

Sand

Thread Starter
Freshman Member
Joined
Aug 11, 2017
Professional Status
Certified General Appraiser
State
Montana
Would you make an extraordinary assumption that the subject is NOT in a flood hazard zone and state that the appraisal is subject to modification if it is determined to be in a flood zone? Also, if the lender requires flood insurance (owner is refinancing), then the expenses would increase as the owner currently does not have it. That would decrease the NOI...and thus decrease the value...
 

Terrel L. Shields

Elite Member
Gold Supporting Member
Joined
May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
Should there be an adjustment to the value for this situation? ….Would you make an extraordinary assumption that the subject is NOT in a flood hazard zone
I would assume the map is correct and recommend to the lender that they get a survey to be sure. So I would not make an EA that the subject is not in a flood zone.
I would assume it was, and find out what flood insurance costs. Using the same cap rate you will use for the income, I would capitalize the annual cost of flood insurance as another burden on the property and adjust accordingly. (Cost $1200/yr, GIM of 10, adjust down $12,000 as a functional obsolescence to the property.) Make it subject to confirmation that the property lies in a flood zone. A surveyor can run an elevation check. If different from your assumption, the lender may ask for a modification of the report.
 

Scott.A

Sophomore Member
Joined
Dec 17, 2013
Professional Status
Certified General Appraiser
State
Iowa
I deal with flood zones routinely in this area. The Mississippi River can be a very annoying neighbor.

While a flood zone here does not necessarily mean a reduction in value, I would never simply ignore it and say "it's FEMAs fault". See if you can find some similar type of construction in and out of a flood zone to compare to, or even if you can find comparable land sales. That should at least give you an indication if the flood zone is impacting the values.

For instance, earlier this year I appraised a retail space on the river front in the flood zone. There weren't any similar retail sales in the downtown in and out of the flood zone. However, there were two lands sales a couple blocks away across the street from one another. One was out of the zone and one was in. There was no reasonable indication of value change between the two. Therefore, I used that as my indication for no value change to my subject. Everyone was happy.

Here in our area, we've grown accustomed to the flooding and the city's flood protection measures. The market got used to the inconvenience, but no property was getting damaged. Then we had this year's flood, and it was a record breaker. Several blocks of downtown real estate was underwater for weeks including my aforementioned subject. Businesses closed. Damage was in the tens of millions of dollars. I guarantee you the next time I run that comparison, there's going to be a big difference in values. It's an interesting study in how complacency affects the market.
 

Scott.A

Sophomore Member
Joined
Dec 17, 2013
Professional Status
Certified General Appraiser
State
Iowa
I would assume the map is correct and recommend to the lender that they get a survey to be sure. So I would not make an EA that the subject is not in a flood zone.
I would assume it was, and find out what flood insurance costs. Using the same cap rate you will use for the income, I would capitalize the annual cost of flood insurance as another burden on the property and adjust accordingly. (Cost $1200/yr, GIM of 10, adjust down $12,000 as a functional obsolescence to the property.) Make it subject to confirmation that the property lies in a flood zone. A surveyor can run an elevation check. If different from your assumption, the lender may ask for a modification of the report.
I never thought of that approach. I'll have to keep that in mind.
 
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