Federal Flood Risk Management Standard: What You Need to Know

The final rule aims to help communities reduce flood damage.

HUD recently published a final rule in the Federal Register implementing the Federal Flood Risk Management Standard (FFRMS). This new rule aligns flood management standards with Executive Order 13690, President Biden’s directive to address climate change and the resulting damage by requiring buildings and facilities built or renovated with federal money to be elevated above flood levels.

By implementing the FFRMS, communities can become resilient to flooding, protect lives and properties, minimize damage to households, reduce insurance costs, and safeguard federal investments by ensuring that federally funded construction projects are built to withstand current and future flood risks.

Annual flood costs. According to the Federal Emergency Management Agency, flooding is the most frequent severe weather threat and the costliest natural disaster facing the nation. Ninety percent of all natural disasters in the U.S. involve flooding. In 2023, the Congressional Budget Office (CBO) estimated that the expected annual flood damages in 2020 to homes with federally backed mortgages were $9.4 billion and projected to increase to $12.8 billion annually by 2050. And the impact on individual and multifamily owners is estimated to be equally staggering, with just 1 inch of floodwater resulting in losses ranging from $10,000 to $27,000, depending on the size of the home.

Expected savings. When the elevation and floodproofing standards required by the rule are applied, HUD estimates the total combined benefits for each year of construction will result in approximately $56.4 million to $324.3 million of savings over the lifetime of the properties. These savings are a result of cost reductions due to decreased flood insurance premiums, reduced flood damage to buildings, costs avoided for homeowners and tenants, reduced expenses associated with relocation or temporary housing, and loss of income due to flooding events.

Compliance date delayed. While the new rule has an effective date of May 23, 2024, after reviewing public comments, HUD determined that required compliance will be delayed until June 24, 2024. New construction where building permit applications are submitted on or after Jan. 1, 2025, must be in compliance with the new rule’s amendments to 24 CFR part 200 (Minimum Property Standards). This, HUD says, is in order to provide developers ample opportunity to adapt and prepare for the requirements of this rule, including the increased elevation standards.

Features of the New Rule

The new rule increases the required elevation for HUD-assisted new construction, the standard of elevation within the FHA Minimum Property Standards, and, for grant and subsidy programs and multifamily FHA-insured projects, substantially improved structures within the FFRMS floodplain.

New construction location. Under the new rule’s updated standards, as applied to HUD’s mortgage insurance and low-rent public housing programs located within the 1-percent-annual-chance floodplain, the lowest floor in newly constructed one-to-four-unit housing must be built at least 2 feet above the base flood elevation.

HUD notes that similar initiatives at the state and local level have been successful. For example, after Hurricane Katrina, the State of Louisiana and the City of New Orleans used HUD funding to replace damaged public housing with new homes elevated beyond the minimum HUD elevation requirements at the time. And when subsequent flooding occurred, water never breached the first floor of the properties and therefore caused no property damage.

Expanded floodplain boundaries. The new rule revises several existing definitions and adopts a three-tiered process for determining the extent of the FFRMS floodplain. The new rule and public comments make clear HUD’s intent to address climate change issues with “climate informed science,” including the use of a Climate Informed Science Approach (CISA) as the preferred approach to determine the new floodplain.

The FFRMS expands the vertical and horizontal floodplain boundaries beyond the special flood hazard area (100-year floodplains). “This final rule provides for a more forward-looking approach to floodplain management, which bases decisions not just on past flooding but on how flood risk is anticipated to grow and change over the anticipated life of a project,” states the final rule.

Floodplain hazard lease notifications. For HUD-assisted, HUD-acquired, and HUD-insured rental properties, new and renewal leases must include acknowledgements signed by residents indicating that they’ve been advised that the property is in a floodplain and flood insurance is available for their personal belongings. Renters must also be informed of the location of ingress and egress or evacuation routes, available emergency notification resources, and emergency procedures for residents in the event of flooding. HUD is encouraging a proactive and systematic approach to notification requirements for sites in floodplains to ensure that prospective renters are made aware of potential flood risk with sufficient warning so that they can make risk-informed decisions.

Bottom Line

Critics of the new rule are saying that the new elevation policy increases building costs at a particularly inopportune time. Housing markets are already suffering from supply shortages and owners and developers are experience rising costs due to inflation and interest rates. But HUD believes that the risk from both extreme weather events and sea level rise is too great to ignore at this time. HUD cites analysis and mapping from independent Climate Central projects that the number of affordable housing units at risk from flooding in coastal areas will triple by 2050.

HUD intends to provide additional guidance regarding the application of the new rule to existing HUD-insured projects or federally funded projects seeking refinancing or acquisition, and HUD will provide additional details for all HUD multifamily housing programs that are expected to comply with the new rule. Going forward, “HUD will rely on project-by-project technical assistance to help grantees find and utilize best available data to make their determinations,” indicating that CISA tools will be regularly updated with best available climate and topographic data.

New Multifamily Insurance Deductibles

Address Rising Costs of Coverage

HUD and the Federal Housing Administration (FHA) recently updated their policies for wind and named storm insurance coverage required for multifamily properties financed with an FHA-insured mortgage. This update was made to address insurance costs for multifamily properties that have risen significantly in recent years, largely due to the greater frequency and severity of storms resulting from climate change.

Higher deductible cap. Effective immediately, FHA significantly increased the deductible cap on permissible insurance deductibles for wind and named storm damage. The new increased the maximum deductible is now the greater of $50,000 or 5 percent of the insurable value per location, up to a maximum amount of $475,000 per occurrence. Previous Multifamily Accelerated Processing (MAP) Guide policy prohibited this deductible from exceeding the greater of $50,000 or 1 percent of the insurable value for any insured building up to a maximum amount of $250,000. The update is designed to provide lenders and property owners with greater flexibility in negotiating property insurance without jeopardizing financial stability.

“Named storms.” According to HUD, heavy rainfall, high winds, and storm surges associated with intense storms have the potential to cause significant damage to property, more so than average seasonal storms that may be historically typical for any given geographical area. Because these stronger storms have the potential to cause significant damage to property, property insurance providers generally define them as “named storms” and assess an increased named storm deductible as a condition of providing coverage in the event of a catastrophic loss.

OCAFs to reflect insurance costs. Prior to the announcement, HUD started to address this issue by revising its methodology for calculating the Operating Cost Adjustment Factors (OCAF) for multifamily properties to better account for rising insurance costs. In the coming months, HUD anticipates further work to address the impact of rising insurance costs across the nation.