Detached Structure Exemption for Flood Insurance
This video focuses on the requirements for using the detached structure exemption under flood insurance rules. Adam explains how to know if a structure can qualify for the exemption or not. A complementary article on this topic can be found here.
Video Transcript
The following is a transcript of this video.
My name is Adam Witmer and I'm your host here at compliancecohort.com. Today I'm going to flood you with information as our topic is on the detached structure exemption for flood insurance.
Let's dive in. For years, under flood rules, we were required to carry flood insurance on each structure that was located in a high-risk flood zone. Under the old rules, I remember going round and round with lenders every day. In the past, where they would not want to have flood insurance on certain buildings, even though the structure was located in a high-risk flood zone and was taken as collateral on the loan, what the old rules said is if you had a structure in a high-risk zone that was taken as collateral, then you had to have flood insurance and even a separate policy on each structure that was in that flood zone. That's what the rules were in the past.
Now, recent laws have changed this. Specifically, the law that changed this was the Homeowners Flood Assurance Affordability Act of 2014. It made some exemptions to this rule. It definitely did not exempt everything, but did make a splash in these requirements. So that was the law that changed it. And then the Interagency Guidance on Flood Insurance actually was the rule that has implemented this change.
In the Interagency Guidance, the exemption is stated as this, “any structure that is part of a residential property, but is detached from the primary residential structure of such property, and does not serve as a residence, is exempt from the flood insurance requirements, and does not need
flood insurance.” So that is what the exemption is. That is a mouthful. There's a lot there, and there's even some subparts in the interagency guidance that explains all these pieces.
The way I like to look at this is in a four part test. So let's look at this test.
The first question we have to ask is: Is this structure part of a residential property? That's the first question. Is it part of a residential property? So if we're doing a loan where all the properties, or all the structures are commercial structures because it's a commercial warehouse without buildings, the structures are not part of a residential property and fail the first test. So it has to be part of a residential property. For example, a farm with multiple outbuildings, as long as there is a dwelling on that farm, then that could pass this first test.
Now, if you just have 100 acres of otherwise bare land, and have a single barn or a silo, it's not going to be part of residential property, because that's considered agricultural property, and would not meet the exemption. So the first test is, is it part of residential property?
Once we've established that there is a residence on the property that this structure is a part of, the second test is: Is the structure we're trying to exempt used primarily for personal, family, or household purposes?
That is a key piece to this rule. That structure has to be used for one of these purposes, and cannot be used for commercial purposes, for agricultural, industrial, or other business purposes. So if it's used for agricultural purposes, maybe you have an Amish customer who has a chicken coop where they raise chicken and sell them to Tyson, the manufacturer of a lot of chicken, then that would not meet the exemption because that structure is being used for agricultural or commercial purposes. So that is a key test there - is it used for personal, family, or household purposes?
If I have a barn for horses that I ride and my family rides, but we don't sell them or there's no commercial purpose, that could qualify under this test and pass the test. So that is key.
The next question we have to ask ourselves, the next test is: Is the structure detached? This should be simple. You would think that this test would be simple, for the most part we could tell if the structure is detached or not, but flood insurance is very particular when it comes to something being attached or detached. If you have some sort of detached structure that has a covering that goes across from the detached structure all the way over to the main residence, then it would not be detached. Also, a deck that's attached to both would then make it attached and be a problem. This should be pretty simple, but it has to be detached from the residential structure.
The final part of our four-part test is this: Is the structure used as a residence? So we have to determine if it is used as a residence. Again, you would think this is easy, however, the way the rule is written, it's a little complex because they define a residence using the IRS definition. Under the IRS definition, generally a residence will contain three things. It will contain a restroom, it will contain a kitchen, and it will contain sleeping quarters. What they say is it's up to the lender to determine if a structure is a residence, and you would do that by looking to see if there is a kitchen, sleeping quarters, and a restroom.
Now, the preamble to this rule also goes on to say that you don't necessarily have to have all three things, because sometimes, you will have a kitchen and sleeping quarters where there is a detached restroom, and that could absolutely qualify as a residence. So, you have to look at it on a case-by-case basis, and make your best determination.
That was our topic for today. I hope I made a splash with this information.
