We are making a loan secured by a house, a detached garage, and a detached three-walled outbuilding used to shelter animals and store hay, all of which are located on a horse farm. The house is being rented out by the owners. How should we classify each building in terms of determining the maximum flood insurance available? Are these residential or non-residential buildings?

In our view, the house is a residential building subject to the $250,000 flood insurance coverage limit. The detached garage may be exempt from flood insurance coverage, and the three-walled outbuilding may be a non-residential building, subject to the discussion below.

The flood insurance rules and guidances distinguish between residential and non-residential buildings when determining the maximum insurance available under the National Flood Insurance Program (NFIP). A residential building includes “one-to-four family dwellings; apartment or other residential buildings containing more than four dwelling units; condominiums and cooperatives in which at least 75 percent of the square footage is residential.” In this case, you have described a house that is a one-to-four family dwelling. The fact that it is being rented does not change the structure of the building or its use as a dwelling.

Regarding the animal shelter, flood insurance is not necessary for any structure that does not have “two or more outside rigid walls and a fully secured roof that is affixed to a permanent site.” You have indicated that the animal shelter has three rigid walls. Consequently, if the shelter also has a fully secured roof and is permanently affixed to a particular site on the property, then we believe that the shelter requires flood insurance. In such case, it would qualify as a non-residential building, which includes “agricultural and industrial structures” and would be subject to the higher $500,000 coverage cap under the NFIP.

As to the detached garage, the flood insurance requirements do not apply to any structure “that is a part of any residential property but is detached from the primary residential structure of such property and does not serve as a residence.” To qualify for this exemption, the detached garage must meet three criteria: (1) the garage must be used primarily for personal, family, or household purposes, and not used primarily for agricultural, commercial, industrial, or other business purposes; (2) the garage must not be joined by any structural connection to the house; and (3) your bank must make a good faith determination that the garage is not intended to be used or actually used as a residence, which generally includes sleeping, bathroom, or kitchen facilities. If your bank determines that the detached garage meets these criteria, then the garage is exempt from flood insurance coverage under the NFIP.

For resources related to our guidance, please see:

FDIC Flood Insurance Regulations, 12 CFR 339.3 (“An FDIC-supervised institution 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 amount of insurance must be at least equal to the lesser of the outstanding principal balance of the designated loan or the maximum limit of coverage available for the particular type of property under the Act. Flood insurance coverage under the Act is limited to the building or mobile home and any personal property that secures a loan and not the land itself.”)

Interagency Questions and Answers Regarding Flood Insurance, Question 8 (‘The maximum limit of coverage available for the particular type of property under the Act’ depends on the value of the secured collateral. First, under the NFIP, there are maximum caps on the amount of insurance available. For single-family and two-to-four family dwellings and other residential buildings located in a participating community under the regular program, the maximum cap is $250,000. For nonresidential structures located in a participating community under the regular program, the maximum cap is $500,000.”)

Interagency Questions and Answers Regarding Flood Insurance, Question 11 (“Residential buildings include one-to-four family dwellings; apartment or other residential buildings containing more than four dwelling units; condominiums and cooperatives in which at least 75 percent of the square footage is residential; hotels or motels where the normal occupancy of a guest is six months or more; and rooming houses that have more than four roomers. A residential building may have incidental nonresidential use, such as an office or studio, as long as the total area of such incidental occupancy is limited to less than 25 percent of the square footage of the building, or 50 percent for single-family dwellings.”)

Interagency Questions and Answers Regarding Flood Insurance, Question 12 (“Nonresidential buildings include those used for small businesses, churches, schools, farm activities (including grain bins and silos), pool houses, clubhouses, recreation, mercantile structures, agricultural and industrial structures, warehouses, hotels and motels with normal room rentals for less than six months' duration, nursing homes, and mixed-use buildings with less than 75 percent residential square footage.”)

FEMA Flood Insurance Manual, General Rules, page 3 (“Insurance may be written only on a structure with 2 or more outside rigid walls and a fully secured roof that is affixed to a permanent site.”)

FDIC Flood Insurance Regulations. 12 CFR 339.4(c) (“The flood insurance requirement prescribed by § 339.3 does not apply with respect to . . . Any structure that is a part of any residential property but is detached from the primary residential structure of such property and does not serve as a residence.”)

FDIC Flood Insurance Regulations. 12 CFR 339.4(c) (“For purposes of this paragraph (c): (1) ‘A structure that is a part of a residential property’ is a structure used primarily for personal, family, or household purposes, and not used primarily for agricultural, commercial, industrial, or other business purposes; (2) A structure is ‘detached’ from the primary residential structure if it is not joined by any structural connection to that structure; and (3) ‘Serve as a residence’ shall be based upon the good faith determination of the FDIC-supervised institution that the structure is intended for use or actually used as a residence, which generally includes sleeping, bathroom, or kitchen facilities.”)