Substantial Improvement and Substantial Damage

  

Purpose 

To protect the property owner’s investment and safety and over time to reduce the total number of structures that are exposed to flood damage, thus reducing the burden on taxpayers through the payment of disaster assistance. This is accomplished by bringing non-conforming structures into compliance with current local, state and federal floodplain management regulations.  

What is Substantial Improvement? 

Substantial improvement means any reconstruction, rehabilitation, addition, or other improvement of a structure, the cost of which equals or exceeds 50 percent of the market value of the structure (or smaller percentage if established by the community) before the “start of construction” of the improvement. This term includes structures that have incurred “substantial damage,” regardless of the actual repair work performed. 

What is Substantial Damage? 

If the repairs needed to bring a structure to its pre-damage condition will equal or exceed 50% of the market value of the structure (not including the value of the land), the structure is considered to be Substantially Damaged. Likewise, if the proposed work to improve a structure will cost 50% or more of the value, the structure is considered to be Substantially Improved and must be brought into compliance with current local floodplain management standards.  

NFIP Community Responsibility 

It is the responsibility of a NFIP community to review all development permits for improvements and/or damages to existing structures located in Special Flood Hazard Areas to determine if the application of the Substantial Improvement and Substantial Damage rules apply, including establishing a definition of market value determination and verifying that the estimated improvement and/or repair costs are less than 50% of the market value of the structure. 

Communities should decide in advance of an event how they will handle significant impacts to structures and develop and document procedures to respond. Consistency is important and makes it easier to defend Substantial Damage determinations when all applicants are treated the same, especially when many buildings have been damaged. State and federal officials do not make Substantial Damage determinations. Local officials make these determinations based on their land use authority and locally adopted regulations. 

Determining Market Value 

For purposes of making Substantial Improvement and Substantial Damage determinations, the market value of the structure needs to be determined. The NFIP regulations do not define “market value,” but generally, market value refers to the price an asset would bring on the open market. The term may be defined by state statutes that pertain to zoning, property taxation or real estate transactions. It is important to note two basic NFIP requirements: 

  • Market value must always be based on the condition of the structure before the improvement is undertaken or before the damage occurred.
  • Only the market value of the structure is pertinent. The value of the land and site improvements (landscaping, driveway, detached accessory structures, etc.) and the value of the use and occupancy (business income) are not included. Any value associated with the location of the property should be attributed to the land, not the building.
  • According to FEMA Publication P-758, May 2010, Section 4.5, acceptable methods for determining Market Value are:
  • Independent appraisals by a professional appraiser.  
  • Detailed estimates of the structure’s Actual-Cash-Value, including depreciation. 
  • “Qualified Estimate” based on the professional judgment of local official. 
  • Adjusted Assessed Value – Good screening tool. 
  • FEMA’s Substantial Damage Estimator. 

Cost to Include When Estimating Improvements and Repairs 

A variety of factors must be included in the cost of improvements or damage repair. Here are some examples.  For a more complete list, see FEMA Publication P-758, May 2010, Appendix D.  

  • Materials and labor cost (including donated or discounted materials and owner- or volunteer-completed labor) 
  • Structural elements 
  • Demolition and debris disposal 
  • Contractor overhead or profit 
  • Utility and service equipment 
  • Elevation or floodproofing 
  • Site preparations 
  • Costs associated with complying with regulations or code requirements 
  • Interior and exterior finish 

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