TAMPA, FL—The Biggert-Waters Act, a flood insurance reform, is now a reality for commercial real estate owners. The big question is: How are the rate increases expected to affect commercial real estate investment?

GlobeSt.com caught up with, Darron Kattan, a managing director and a multifamily brokerage specialist, focuses on properties in Central, West Central, and Southwest Florida, with Franklin Street and Matthew Harrell, a managing director of Franklin Street Insurance Services, to get perspective. The duo also offers insight into which asset classes are most affected and offers advice for those looking to buy or sell properties.

GlobeSt.com: How are the rate increases expected to affect commercial real estate investment?

Kattan and Harrell: This act will have a big effect in at least two ways. First, higher premiums mean that it will cost owners a lot more to operate their properties which can put a huge dent in their NOI. Owners will not be able to directly pass on the cost to their tenants—their only option is to raise rents. Which, some tenants may be willing to do to continue living near the water.

Second, the increased premiums will also affect values when an owner goes to refinance or sell. With decreased cash flow on the financial statements, buyers will not be willing to pay the same price they would have prior to the increase simply because they won't be able to achieve the returns they expect.

In this case, nor the buyer or the seller would get the true value they seek in the transaction which could cause a huge slowing trend in deals getting done in these high-hazard areas. We've already faced an issue in representing a seller whose property lost a large amount of value due to the rate increases. In this case a creative solution has been identified allowing us to move that property back under contract to sell.

GlobeSt.com: Are there any asset classes impacted more than others?  

Kattan and Harrell: As we said, any buildings constructed prior to 1975 (pre-FIRM) will face the biggest hike, but beyond that, multifamily investors will be most impacted. Currently, each building in a multifamily community must have its own separate flood policy. When you have several buildings, each facing significant premium increases, the cost adds up pretty quickly.

GlobeSt.com: How are you advising your clients looking to buy or sell a property?  

Kattan and Harrell: We are telling them to go into each deal with your eyes wide open. Look at each deal very carefully to understand what you are being presented.

In some cases, we've been able to provide creative solutions to help investors avoid some of the significant increases, but there is no one-size-fits-all solution. It's also worth noting that the framers of the Biggert-Waters Act were not aware of the some of the negative effects it is having on premiums and have indicated they will propose reforms to the law. 

So we advise commercial real estate owners to watch the issue closely and stay tuned.  Lastly it important for brokers to look at all angles of your situation—between our insurance division and investment sales division.