Implications of New Jersey New Flood Risk Disclosure Law on CRE

New Jersey recently enacted a law requiring landlords and real estate sellers to disclose flood risks to tenants and buyers. Passed in July 2023, the law took effect on March 20, 2024.  This law impacts both residential and commercial properties. 

The impetus for the flood disclosure law likely stems from growing concerns about climate change and its impact on flood risks. We’re seeing more frequent and intense rainfall events, leading to what was once considered rare floods happening with alarming regularity. These “hundred-year” or “thousand-year” floods are becoming a much more frequent reality, highlighting the urgency of addressing climate change.

From Bill to Law

Multiple factors prompted the creation of this law. Climate change is driving the Garden State’s growing threat from flooding. The danger zones include coastal and inland areas and impact historically flood-prone locations and those previously considered safe.

Here’s a breakdown of the looking challenges:

Coastal squeeze: Rising sea levels are a significant concern. Projections indicate that by 2050, sea level increases will exceed 2.1 feet compared to 2000 levels. This rise could permanently inundate over 40,000 New Jersey properties along the coast.

Intensified inland floods: The state is experiencing a significant rise in precipitation intensity, exceeding historical trends. This increase translates to a heightened risk of flash flooding for inland areas.

The combined coastal and inland flood risks are expected to worsen significantly within the timeframe of a typical mortgage issued in or after 2020. Property owners and potential buyers must recognize the threat of flooding in the state.

Climate change also translates into concrete challenges for developers. Floodplain elevations are being raised, significantly reducing the developable space on a property. Wetlands, which have historically posed difficulties for development, become even more problematic with changing flood maps. 

Additionally, increased development and impervious surfaces contribute to flooding issues, as there’s less space for water to dissipate naturally. Residents regularly voice concerns about runoff during zoning hearings for proposed new developments. The more development there is, the greater the potential for flooding problems.   

Risk Matters: Location and Beyond

New Jersey’s varied landscape translates to diverse flood risks and costs. The Federal Emergency Management Agency (FEMA) plays a key role in analyzing flood risks nationwide. In 2021, the agency implemented a revamped risk rating system (Risk Rating 2.0). The system goes beyond broad brush risk categories and assigns risk based on specific properties.

Your location, building structure, and other characteristics are factored in, creating a personalized flood insurance cost calculator. Just as credit scores influence loan interest rates, Risk Rating 2.0 informs flood insurance providers to help set premiums. FEMA’s flood risk maps are readily translated by insurance companies into flood insurance rate maps, allowing you to see your property’s risk zone.  

Understanding these variables empowers property owners to potentially reduce their flood insurance costs. By mitigating your property’s flood risk, such as elevating utilities or installing flood barriers, you may qualify for lower premiums. Shopping around and comparing quotes from different insurance providers can help you find the most competitive rates.

Implications of the Flood Risk Disclosure Law on Landlords, Sellers, and Tenants

Landlord Responsibility

Landlords must notify tenants in writing, separate from the lease (in 12-point font), whether the property is in a FEMA special hazard area (high risk) or moderate flood hazard area (moderate risk) and disclose any known history of flooding on the property. Landlords must advise tenants that standard renter’s insurance typically excludes flood damage and encourage them to obtain separate flood insurance.

New Jersey doesn’t currently mandate that property owners purchase flood insurance. However, mortgage lenders may require owners to buy policies for properties deemed at risk for flooding. Premiums will continue to rise, with five of the country’s biggest insurance companies excluding natural disaster protections and other coverages in some parts of the country. Flood insurance costs, on average, are between $572 and $2,049 annually in NJ.

According to Aon, an international risk management firm, U.S. insurance companies paid nearly $296 billion in natural disaster losses from 2020 to 2022. The first six months of 2023 saw $40 billion in insured losses from natural disasters.

Repercussions for Non-disclosure by Landlords

Tenants can terminate their lease with written notice if they learn their property is in a FEMA flood zone and their landlord fails to disclose it. If flooding occurs and the landlord says nothing about the risk, tenants may also pursue legal remedies, potentially including compensation for flood damages.

Seller Responsibility

Sellers must complete a Property Condition Disclosure Statment that includes flood risk information, such as FEMA flood zone designation (special flood hazard area or moderate flood hazard area) and any known past flooding issues. Sellers must also advise potential buyers of the online tool the Department of Environmental Protection (DEP) provides to verify flood zone status.

Repercussions for non-disclosure by sellers

While buyers can’t terminate a purchase agreement for undisclosed flood risks, they may seek compensation for damages caused by flooding if the seller fails to disclose the risk.

Buyer and Tenant Responsibility

Before purchasing or moving into a property, prospective buyers and tenants (or their brokers) must conduct due diligence. Tenants can terminate their lease in writing if the landlord fails to disclose any flood risk. If there is a flood and tenants learn retroactively that their landlord didn’t alert them of a possible risk, they also have a cause for damages. Buyers can’t terminate a contract to purchase, but they can claim damages. But even before signing on the dotted line, a tenant or buyer can use New Jersey’s Flood Indicator Tool.

Flood Indicator Tool

This screening tool is valuable for anyone interested in learning about potential flood risks associated with a specific property, although it does have limitations. It identifies potential risks by highlighting the presence of certain features, like bodies of water, watercourses, and FEM flood zones. However, this information doesn’t translate into a definitive flood risk assessment. 

Local conditions significantly influence flood risk. This tool doesn’t account for those nuances. It also doesn’t address the applicability of regulations set by the DEP. But here’s what the tool does take into consideration:

  • Water Features: The presence of lakes, rivers, streams, and other water bodies.
  • FEMA Flood Zones: Designation of the property within FEMA’s special or moderate flood hazard areas.
  • State Flood Hazard Areas: Areas identified by the DEP on its Flood Hazard Area mapping (Flood Plan) and associated Design Flood Elevation profiles.
  • New Jersey Tidal Climate Adjusted Flood Elevation (CAFE): An indicator of potential future flood risks in tidal areas due to sea-level rise.

A few important caveats: While the tool may not identify any flood indicators, it doesn’t guarantee the property is flood-proof. Flooding can occur anywhere. The extent of flood-prone areas is growing due to increased rainfall intensity and rising sea levels.

Property condition disclosure form

We’ve used property condition disclosure forms for a while, and the legislature has added the flood risk disclosures at the end, increasing the document’s length. The residential and commercial real estate industry is still uncertain about how it will be applied in practice and whether more regulations will be forthcoming to provide more clarity.

While real estate professionals like brokers and lawyers are likely aware of the new requirements, it’s uncertain if the general public has been adequately informed. This lack of awareness creates an additional burden for lawyers, who often must take responsibility for ensuring these legislative mandates reach the public. Ultimately, the intent behind the law — increased transparency for the public — is positive, but some feel the implementation could’ve been smoother.

Are you a commercial real estate investor or looking for a specific property to meet your company’s needs? We invite you to talk to the professionals at CREA United, an organization of CRE professionals from 92 firms representing all disciplines within the CRE industry, from brokers to subcontractors, financial services to security systems, interior designers to architects, movers to IT, and more.

Related Articles