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Lindley Estes is a business writer for The Free Lance-Star and This blog is on Fredericksburg-area business. Send an e-mail to Lindley Estes.

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River threat may bring policy hikes for city sites

UnknownLooming price increases for the federal government’s flood insurance program are likely to hit the city of Fredericksburg hardest among area localities, according to recently released Associated Press data.

Fifty-seven percent of properties in the city of Fredericksburg with flood insurance policies face premium increases in the years ahead, according to the data.

There are proportionately more flood policies in effect in Fredericksburg than other localities because of the city’s location along the Rappahannock River and relatively dense population in the downtown area near the river.

Flood insurance rates have been subsidized by the federal government for many years, but premiums haven’t been sufficient to cover the payouts. That has left the National Flood Insurance Program billions of dollars in debt.

In Fredericksburg, according to data the AP obtained from the Federal Emergency Management Agency, 113 policies were receiving a rate discount as of the end of 2012.

That was nearly twice as many policies with a rate discount than in Stafford County, which had the region’s second-highest total, at 66. Fredericksburg’s population is about one-fifth of Stafford’s.

In Spotsylvania County as of the end of 2012, there were 22 policies with a rate discount. The tally was 26 in Caroline County and nine in King George County.

In 2012, Congress passed a law requiring about 1.1 million policyholders to start paying rates based on the true risk of flooding at their properties.

Affected homeowners will be hit with annual premium increases as high as 18 percent year after year, until the government is collecting what it needs to pay out claims. Owners of businesses and second homes face increases of up to 25 percent each year.

In Fredericksburg, according to the AP data, 72 policies will face annual increases of 25 percent until the policyholder switches to a “risk-based rate,” and 41 policies will face annual increases of 18 percent. About 54 businesses will be affected.

Many area Realtors, real estate investors, businesses and bankers have expressed concern about what effect the looming increases could have on property values and rental rates in the downtown area. Some have called for the Rappahannock to be dredged to lessen the flood risk.

Thus far the insurance increases have mainly been noticed by people who have purchased properties of late along downtown Fredericksburg’s central business district, much of which is in a flood zone.

While the rate hikes will be gradual for existing property owners, the new rates have taken effect immediately on properties in the flood zone that have recently sold.

One of the affected people is Jay Jarrell, who, along with a group of others, in October purchased the 7,220-square-foot building at 822 Caroline St. for $800,000 as an investment.

Jarrell said even though the building is just a foot and a half into the 100-year flood zone, his investment group had to purchase $500,000 worth of flood insurance in order to secure a bank loan. That is the maximum amount of coverage for commercial properties under the federal program.

He said he wouldn’t have purchased insurance for such a small risk of flood damage unless he was required to. People who don’t use bank financing to buy properties in flood zones aren’t required to get separate flood insurance.

Jarrell said the previous owner’s flood insurance premiums were $6,000 per year. The original quote he got was $18,000 a year, which he said “took an income-producing property and created a loss.” Eventually his group was able to get the annual rate down to $8,000 after doing some fine-tuning and opting for very large deductibles.

Drs. Chet and Deepa Pai, who recently bought the 4,368-square-foot building at 709 Caroline St., ran into a similar situation. Chet Pai said the flood insurance premium he was required to pay—$27,000 per year with a $50,000 deductible—was worrisome and could have a negative impact on downtown property values.

Mike Adams, who is developing the One Hanover riverfront condominium building, said flood insurance rates on the Sophia Street project are reasonable because most of the ground-level space is reserved for surface parking only.

The National Association of Realtors has been lobbying against higher flood insurance premiums because of the effect they could have on the ability to buy and sell properties within flood zones.

The Associated Press contributed to this report. Click here for the AP’s national report on this matter.