Wisconsin’s South Shore offers some of the most scenic Lake Superior properties in the region. For many people, shoreline property is more than land. It may be a home, cabin, or property they hope to pass down. However, owners who plan to remodel, expand, or rebuild should understand how federal floodplain rules may affect their options. One of the most important is the Substantial Improvement and Substantial Damage standard, also referred to as the FEMA 50% Rule.
Local floodplain management programs can use building repairs and improvements to prevent flood damage to existing structures. The Federal Emergency Management Agency (“FEMA”) manages the National Flood Insurance Program (“NFIP”), which includes over 21,000 communities. By participating in the NFIP, communities adopt and enforce regulations and codes that apply to development in Special Flood Hazard Areas (SFHAs). Local floodplain management regulations and codes include minimum NFIP requirements for both new and existing structures that are “substantially improved” or “substantially damaged.”
The original legislation for the NFIP was passed in 1968. Congress found that “a program of flood insurance can promote the public interest by encouraging sound land use by minimizing exposure of property to flood losses…” The NFIP is meant to encourage States and local governments to recognize and incorporate flood hazards in their land use and development decisions. When a proposal is made to develop within a flood hazard area, application of the criteria set forth in Federal regulation (Title 44 Code of Federal Regulations [CFR] Section (§) 60.3) is intended to minimize exposure and flood-related damage. Federal regulation regarding the FEMA 50% Rule can be found in Title 44, Code of Federal Regulations, Emergency Management and Assistance Parts 59 and 60.
In general, the 50% rule balances how much work is being done compared to the value of the structure. A substantial improvement is a reconstruction, rehabilitation, addition, or other improvement where the cost of the work equals or exceeds 50% of the market value of the structure before the start of construction. Substantial damage is similar, but it applies after damage occurs. FEMA describes a building as substantially damaged when the cost to restore it to its before damage condition equals or exceeds 50% of the market value of the structure before the damage occurred. If the 50% threshold is met, the project may trigger additional floodplain compliance requirements. Depending on the property and flood zone, this could mean the structure must be elevated, relocated, demolished, or otherwise modified to meet current floodplain standards.
Some states and communities have adopted requirements for the FEMA 50% Rule that exceed the minimum requirements in order to better protect their citizens and property. For example, some states or communities may adopt a percentage threshold lower than 50%. Others may adopt what is commonly referred to as a “cumulative substantial improvement” requirement. Under the minimum NFIP requirement, the 50% threshold is applied to each individual application for repairs or improvements, meaning each application may include work up to 50% of the structure’s market value. If a cumulative substantial improvement requirement is adopted, the 50% threshold is measured over a selected period of time, which could include the life of the structure. This can cause buildings to be brought up to current floodplain standards sooner because multiple projects are counted together over time. Thus, in a community that follows a cumulative substantial improvement requirement over the life of the structure, even necessary work, such as replacing a roof, can use up a significant portion of the 50% limit and leave less room for future improvements.
For example, a cabin in a mapped flood hazard area has a market value of $200,000, not including the land. If the owner wants to complete a $60,000 remodel, the project would equal 30% of the structure’s value. Based only on the 50% calculation, that would not reach the substantial improvement threshold. But if the same owner instead proposed a $110,000 addition and remodel, the project would equal 55% of the structure’s value. That would be treated as a substantial improvement, meaning the owner would need to bring the structure into compliance with floodplain standards. If the community uses a cumulative substantial improvement requirement measured over the life of the structure, the $60,000 remodel would leave only $40,000 for future improvements before the owner reaches the 50% limit.
Substantial damage uses the same 50% threshold, but it applies after damage occurs. For example, if a structure was worth $180,000 before a storm, fire, flood, or other damage, and it would cost $75,000 to restore it, the repair cost would be about 42% of the structure’s value and would not meet the substantial damage threshold. If the restoration cost was $95,000, however, the repair cost would be about 53% of the structure’s value and would be considered substantial damage under FEMA’s guidance. At that point, the owner may face more than ordinary repair costs because the structure would need to be brought into compliance with current floodplain standards, such as elevation or other flood resistant construction requirements.
The FEMA 50% rule can feel frustrating because it may appear just when an owner is trying to improve or repair a property. However, as highlighted in the policy, when a building in a high-risk flood area is substantially improved or substantially damaged, it should be made safer and more resilient going forward. For anyone who owns or hopes to own property on Wisconsin’s South Shore, the best time to understand the rule is before starting a project.
Haley Webb is an attorney with Fryberger, Buchanan, Smith & Frederick, P.A., practicing in the areas of Real Estate and Estate Planning. This article is not intended to provide legal advice. You should always consult with an attorney about your specific circumstances.
