Flood Plain Pain

The Real Estate Espresso Podcast

Flood Plain Pain

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Welcome to the Real Estate Espresso Podcast. Your morning shot at what’s new in the world of real estate investing. I’m your host, Victor Menasce. On today’s show, we’re unpacking some of the critical details that every sophisticated investor developer needs to understand about the different types of floor plan designations and how wetland mitigations could make or break your deal.

Firstly, why would you even want to develop in a floodplain? For one, the land doesn’t often present itself as a floodplain, in fact, it often isn’t. It’s completely dry most of the time. But like every other opportunity there’s layers of risk and regulation you need to run through. The U.S. Government, via FEMA, maps out risks using the Flood Insurance Rate Maps. These are called FIRMs – the acronym. These can be pictured as overlays on top of your site plan that will tell you how likely the water is to rise and cause problems.

Firstly, there is the 100 Year Flood Plane, or what’s also called the Special Flood Hazard Area. These zones, either Area A or Area V (depending on the geography), are considered hot spots. That 100-year floodplain isn’t constrained to a flood happening every 100 years. In a statistical sense, there’s a 1% chance of it flooding every single year. The V-zones are coastal, where the water might be coming in due to wave action. A-zones are inland. If you build on either of these, you will likely be required to hold flood insurance. And there will be stringent design requirements.

Then there’s the 500-year floodplain – moderate-risk areas. The flood risk here is lower, but it’s not zero. You may not need mandatory insurance, but lenders and investors will still want to take a closer look. And then there’s the minimal, or undetermined risk. Outside of these zones, insurance is definitely not mandatory, but just because the area isn’t mapped as high-risk, doesn’t mean it doesn’t flood.

Next is the floodplain X, or sometimes called zone X. This designates areas considered to have a low or moderate risk of flooding. It can be further divided into what’s called a shaded zone X (moderate flood hazard, usually the land between the 100-year boundary and the 500-year boundary) and the un-shaded zone X (minimal flood hazard, typically above the 500-year flood level). They may also be protected by levies from a 100-year flood. Local drainage problems may still cause shallow flooding issues. Property owners in zone X are not required by law to carry flood insurance, but it may be available. Zone X is considered outside the special flood hazard area, so building restrictions and insurance mandates are much enigmatic.

Flood zones are a regulatory regime. They are changing with new imaging technology, specifically lidar, which uses light detection and ranging, capturing surface features, elevation changes, and even what lies beneath the vegetation. These models are much more accurate, to centimeter precision. With the use of lidar, you have much more detailed elevation data than some of the older techniques, playing a transformative role in determining floodplains. Engineers can determine which areas are likely to be inundated during floods by comparing water surface models with ground elevation from lidar. The flood models take lidar data and calculate water flow rates, direction, depth, velocity – all those factors affecting a flooding pattern. Lidar is now a requirement, all new flood maps are created using lidar technology. But not all existing FEMA floodplains were created with lidar data. In fact, 75% of the existing US flood maps are considered out of date because they would have relied on less accurate topographic data, making them less reliable for flood risk assessment. Many communities are challenging FEMA’s floodplain maps because these were put in place so long ago and are viewed as outdated.

As you know, the US government has often experienced budgetary shutdowns, sometimes with no signs of quick resolution. And even if you’re not relying on government funding for a loan, if your property is in or next to a floodplain, your lender might require paperwork from FEMA before they can close the loan. In a government shutdown scenario, your loan cannot close until the government re-opens and FEMA gets caught up on their backlog of requests.

Whilst some developers may say they’re never going to develop in a floodplain, it’s a decision that could be considered overly restrictive. Building can be done in floodplains. There’s a lot of cities, like Houston and New Orleans, that have millions of people living within flood-prone areas. Risks can often be mitigated by building at a higher elevation, so that you’re in fact outside the floodplain itself. It should certainly be one of those steps you execute early in your due diligence process. Determine what your flood risks might be before investing a significant amount of money in a property.

As you reflect on this, I wish you an awesome rest of your day. Go make some great things happen and we’ll talk to you again tomorrow.

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