Kerin & Fazio, LLCSeveral years after Hurricane Sandy hit coastal Connecticut many municipalities have adopted new FEMA flood maps. These flood maps predict high waves and larger storm surges than the older FEMA maps called for. The new regulations are a result congress passing in 2012 the Biggert-Waters Flood Insurance Reform Act which called for FEMA to make changes to the way the flood insurance program is run and raise rates to reflect the true costs of the flood risks. The new maps add as much as 5-7 feet to the base flood elevation (BFE) to coastal areas, also changing many AE designations to VE along the shore. All the “V” zones are susceptible to major waves and storm-induced velocity wave action, while the AE zones are not impacted by the velocity wave action. All these designations have an impact on the type of measures needed to be taken to conform to the new regulations and requirements.
Homeowners that choose not to conform to the new regulations by elevating their homes and using water resistant building materials are facing premiums that increased tremendously. For example, an existing modest home that is 4 feet below the BFE will have a premium of $9,500 per year, while the same home at BFE, the premium would be $1,410 per year. If the home is raised to an elevation of 3 feet above the BFE, the premium could drop to only $427 per year. The savings by raising the home over a 10 year period could be close to $90,000; however the cost to complete this could run deep into the six figures. What is more alarming is if your home has suffered from storm damage and/or you decide to renovate and the cost is greater than 50% of the depreciated value of the improvements, local building codes will require that you conform to the stricter flood elevations. These new elevations will now require the dwelling to be lifted or reconstructed at the new BFE, use flood resistant materials and have breakaway wall materials.
Homeowners should be concern more than ever that the value that the town assessor has allocated to the dwelling portion of their tax assessment is correctly calculated, since it is the basis that the building department uses when issuing a permit for construction in a flood regulated area. The basic rule is “if the cost of improvements or the cost to repair the damage exceeds 50% of the market value of the building, it must be brought up to current floodplain management standards.” With many of Connecticut town’s historically allocating the majority of the value in the land for tax assessment purposes, we are left with the dwelling representing only a small portion of the assessed market value. For example, if a proposed improvement project will cost $100,000 and the dwelling assessment value is $180,000, ($100,000/$180,000=56%), the project exceeds the 50% threshold, it is considered a substantial improvement and must meet the new floodplain guidelines. Construction projects affected are remodeling, rehabilitation, additions and repairs and reconstruction to structures. If building permits are not required for items such as reroofing, or for projects under a certain dollar amount, these are then not subject to the substantial improvement calculation requirements. Project costs shall include all material, labor, built in appliances, overhead, and profit. It is suggested, if a homeowner is concerned with regards to these actual building costs, a licensed professional should be employed. When considering the market value of the structure, make sure not to include land, landscaping or any detached accessory buildings in the overall building value. An independent certified real estate appraiser can be hired to provide the market value of the structure, less depreciation from age and condition if you don’t agree with the town’s calculation.
Considering all these factors that impact properties in flood zones, new increased BFE elevations, changes of the AE and VE zone delineation, and increase flood insurance premiums, property owners are finding it harder to sell or rehabilitate older homes in flood prone areas. The cost to bring these homes into conformity may outweigh the overall value of the structure, resulting in an immediate loss in value to many homes. Assessors and appraisers should now be considering adjustments for land in the form of land influence factors to reflect the difference in BFE elevations.
Other adjustments that should be considered for improved properties is functional obsolescence to the structure created by the new map changes. For example, if a home’s elevation is at 8 feet, and located in an AE-8 zone prior to the map changes it doesn’t require elevation. Once re-mapped into a VE-15 zone it immediately creates functional obsolescence to the building, because it creates an immediate deficiency in the building’s elevation height and design features. An appraiser can be hired to calculate the extent of the functional obsolescence and/or the cost to cure it.
Law update: On March 21, 2014 President Obama, signed the Homeowner Flood Insurance Affordability Act into law (HFIAA). This law repealed certain provisions of the Biggert-Waters Act. Most notable was that the law lowers recent rate increases, prevent future large increases; however it did implement a surcharge on all policies. It also makes provisions for gradual rate increases with subsidized policies increasing no less than 5% and no more than 18% annually. The exception is properties that are non-residential, and repetitive loss properties. The new law also repeals the provision that required FEMA, upon the effective date of a new or updated fold map to phase in premium increases over 5 years at 20% per year.
As of October 1, 2015, federal agencies issued a final ruling on loans in flood zones, this ruling offer clarification of existing rules and rules stemming from Biggert-Waters and the Homeowner Flood Insurance Affordability Act. One of the big issues clarified was that land value is not to be included in the required coverage amount. Secondly, residential buildings detached from the primary residential structure and do not serve as a residence is exempt. These factors are aimed at lowering flood insurance premiums, however providing adequate coverage for homeowners.
Michael Fazio is managing partner of Kerin & Fazio, LLC, Fairfield, Conn.