How Does HUD’s New Floodplain Management Rule Impact Potential FHA-Insured Projects?

If you work in the area of HUD-insured multifamily or healthcare loans, you are likely to have encountered a floodplain on a property prior to a HUD application and wondered “what do I do now?” You would not be alone.

HUD’s environmental requirements in 24 CFR Part 50 are some of the most daunting and least understood elements of the HUD loan process. If your property is located in a floodplain or designated floodway, HUD’s floodplain management requirements at 24 CFR Part 55, specifically, have the potential to add project costs, delay loan application processing or even prohibit HUD assistance all together. The often misunderstood floodplain requirements are changing and with HUD’s recent regulatory amendment to Part 55 may raise more uncertainty and confusion around environmental compliance for lenders and borrowers.

With changes coming, here is what you need to know to be ready:

1. What’s the change, when does it happen and why?

On April 23, 2024, HUD published the Final Rule amending its floodplain regulation, 24 CFR Part 55. The revised floodplain regulations increase flood protections for HUD-assisted projects with the goal of reducing flood loss. Additionally, the new regulations further protect the federal government’s financial investments in housing. The new rule uses climate informed science to better identify properties at greater risk from flooding. 

Substantively, the new regulations expand the floodplain area of concern in Part 55. Previously, floodplain obligations were triggered if there was a 100-year floodplain (also known as a Special Flood Hazard Area) onsite, as depicted on FEMA’s Flood Insurance Rate Maps (FIRM). (Note: for “critical actions” like healthcare facilities insured under the Section 232 program, floodplain protections were triggered if there was a 500-year floodplain onsite.)

Under the new rule, floodplain obligations will be triggered if there is a property with a “Federal Flood Risk Management Standard (FFRMS) floodplain” onsite. The FFRMS floodplain is an expanded floodplain area defined by executive order and HUD regulation. Essentially, it is an area of increased flood risk determined either by:

1) Modeling that uses a Climate Informed Science Approach (CISA);

2) The 500-year floodplain, as identified on a FEMA FIRM; or

3) Areas 2-3 feet (depending on a “non-critical” or “critical” action determination) above the Special Flood Hazard Area’s base flood elevation, as identified on a FEMA FIRM.

HUD prefers using climate informed modeling to determine the FFRMS Floodplain; however, the other methods are necessary due to flood map/modeling availability.

Despite the enactment of the new rule in April 2024, the requirements will not be implemented for FHA-insured program participants until January 1, 2025. The January 1 timeline applies to both multifamily and healthcare properties seeking FHA insurance. It is important to note that if your loan is not closed by January 1, 2025 the floodplain management analysis in the environmental review will need to be updated to comply with the FFRMS standards. 

2. How do I know if a property has an FFRMS floodplain onsite?

To determine whether a property includes an FFRMS floodplain, online resources will be used. As summarized above, two of the methods to determine the FFRMS Floodplain use existing FEMA FIRM maps. Those FIRM maps can be accessed via the FEMA Flood Map Service Center (https://msc.fema.gov/portal/home). HUD prefers users to identify flood risk using CISA. Accordingly, there is a new online mapping system available which can be used as supporting documentation to make a CISA FFRMS Floodplain determination. The Federal Flood Support Tool (Beta) is available here: www.floodstandard.climate.gov.

The Federal Flood Support Tool allows users to draw their property on a GIS map for more precise floodplain identification. Additionally, the tool allows the user to select whether the project is a critical or non-critical action. Although not in final form, use of the Federal Flood Support Tool is the future. It will be the most common method for determining an FFRMS Floodplain once the tool covers more and more parts of the country.

3. What happens if there is an FFRMS Floodplain on my site?

In addition to requiring more projects to comply with Part 55 because of an expanded floodplain area of concern definition, the requirements for compliance with Part 55 have also expanded. As with the previous regulation, multifamily and healthcare projects with an onsite FFRMS Floodplain will be required to comply with HUD’s 8-Step (or in some cases 5-Step) decision-making process[1] unless exempt from the regulation.[2]

Of note, Step 5[3] obligations are significantly changed in the new rule. Step 5 now requires all new construction and substantial rehabilitation projects located in an FFRMS Floodplain to elevate or floodproof structures above the FFRMS floodplain to minimize impacts. This requirement to elevate or floodproof – along with all other 8-Step requirements - will impact project costs and timing. As a result, it is critically important to understand all compliance requirements early in the project development process to ensure project viability. Flood insurance will still be required for all structures located in the SFHA (or 100 year floodplain). The SFHA will not necessary align with the FFRMS Floodplain. Accordingly, documentation and compliance with flood insurance may become more cumbersome.

4. Beyond expanding the floodplain of concern, are there any other notable changes?

There are notable changes and the new regulations make multiple changes to clarify, or slightly modify, current floodplain management procedures. From a compliance standpoint, it is important to note that through the new rule, HUD has modified and added Part 55 exemptions. For example, the revised regulations will expand the “incidental portion” exemption.[4] The new rule also creates two new exemptions for compliance for certain special projects that improve energy or water efficiency in utilities, along with certain small infrastructure improvements.

Other specific changes in the new regulation are beyond the scope of this article, but is important to evaluate the floodplain management regulations comprehensively when seeking Part 55 compliance.

Bottom Line:

Don’t hide your head in the sand. Floodplain management is complicated, but it is also too important to ignore. Initial floodplain identification and proper compliance will be critical for any project seeking FHA insurance.

HUD hopes the regulatory amendments will result in more resilient housing; however, the changes also alter current floodplain management analyses required as part of the HUD environmental review (also known as the “HEROS” review). You will likely find more sites requiring “8-Step” or “5-Step” processes which, for construction and substantial rehabilitation projects, now require elevation or floodproofing in order to comply.

The new rule should not deter you from pursuing a HUD insured loan for otherwise viable sites, as most floodplain compliance issues can be resolved. The amended regulations are not meant to preclude good projects from entering the HUD portfolio or stall loan applications. You just need to be prepared to navigate new challenges in an already complex process.

Don’t be afraid to ask for help!