It may be possible to avoid the flood insurance requirements for this loan by structuring your security agreement for the loan to exclude the golf course pump-house from the property securing the loan. (If you already have executed the security agreement, this could be accomplished by an addendum.) We recommend consulting with bank counsel to structure the agreement or addendum if you choose this route.
Otherwise, if the golf course pump house is included in the property securing the loan, the loan will likely be subject to the flood insurance requirements. Any loan secured by a “building” is considered a “designated loan” that is subject to the flood insurance requirements. 12 CFR 339.3. The regulations define “building” as follows (12 CFR 339.2):
“Building means a walled and roofed structure, other than a gas or liquid storage tank, that is principally above ground and affixed to a permanent site, and a walled and roofed structure while in the course of construction, alteration, or repair.” We believe that a pump house or pumping station would fall into this definition of “building,” provided that it has walls and a roof.
The Interagency Questions and Answers Regarding Flood Insurance include a Q&A (Question 24) explaining that a lender could “carve out” buildings from its security interest to avoid the flood insurance requirements, while also warning of the risks of this approach:
24. Some borrowers have buildings with limited utility or value and, in many cases, the borrower would not replace them if lost in a flood. Is a lender required to mandate flood insurance for such buildings?
Answer: Yes. Under the Regulation, lenders must require flood insurance on real estate improvements when those improvements are part of the property securing the loan and are located in an SFHA and in a participating community.
The lender may consider “carving out” buildings from the security it takes on the loan. However, the lender should fully analyze the risks of this option. In particular, a lender should consider whether it would be able to market the property securing its loan in the event of foreclosure. Additionally, the lender should consider any local zoning issues or other issues that would affect its collateral.