Thomas D. McCloskey – December 20, 2012<\/p>\n
Executive Summary<\/span><\/strong><\/p>\n This Alert hopes to sensitize readers to the issues that are emerging in the post-Sandy rebuilding process and to urge both caution and patience when considering the finite alternatives \u2013 and funding resources \u2013 out there.<\/p>\n We are now almost eight weeks post-Sandy. As recovery and cleanup efforts continue, with power restored to virtually all who lost it, attention has turned to repairing the damage and the gargantuan rebuilding task ahead.<\/p>\n The scope and magnitude of the damage wrought by Sandy has been graphically depicted in post-storm photographs, aerials and videos from fly-overs of the worst affected regions of the coastline and landward. Most homeowners and businesses with properties located in the coastal flood zones and other flood-prone areas that were ravaged by wind, wind-driven rain, flooding and an unprecedented storm surge have quickly come to realize the complexities involved in seeking financial and other assistance, as well as in processing insurance claims. The labyrinth of procedures, documentation, inspection, damage evaluation and claims adjusting processes \u2013 both with primary homeowner insurance carriers and flood insurance carriers \u2013 is dizzying.<\/p>\n Making matters worse, the interplay by and among local municipal, county, state and federal agencies (including FEMA) having or exercising jurisdiction over the rebuilding effort further complicates the process and continues to be a source of confusion for those looking for relief and direction. In reality, unintended government inertia will continue to impinge upon the collective desire (and zeal) to rebuild \u2013 and well before the issue of who is going to pay for it or how it might be subsidized is even put on the table.<\/p>\n And yet, to blunt the severe economic (and emotional) impact of Sandy, the resoluteness and determination of all \u201cJersey Strong\u201d New Jerseyans and the laudable, aggressive efforts of the Christie Administration to rebuild our severely damaged shore communities, boardwalks, tourist attractions and the infrastructure that supports it all, grows stronger with every day that passes, curtailed, suppressed if not blinded only by the harsh realities of the inter-governmental\/regulatory matrix that one must pass through to secure a building permit to actually rebuild.<\/p>\n True, local building code officials have been issuing permits, albeit on a limited basis, to homeowners to facilitate things like electrical system repairs, removal and replacement of wet or damaged sheetrock, and so on \u2013 things needed to render a home habitable so that residents can return home. But not for homes or properties that have been deemed \u201csubstantially damaged\u201d and thus subject to more scrutinizing review, wholesale rebuilding, or, demolition and rebuilding entirely anew. Simply put, buildings or structures located in a special flood hazard area that are determined to be \u201csubstantially damaged\u201d must be brought into compliance with the minimum requirements of the community\u2019s National Flood Insurance Program (NFIP) compliant floodplain management laws or ordinances.<\/p>\n Communities participating in the NFIP program determine a flood damaged home to be \u201csubstantially damaged\u201d if the costs to repair or rebuild are equal to or exceed 50 percent of the municipality\u2019s equalized assessed valuation of the structure.<\/p>\n Consider, for example, a property located in a designated flood hazard zone assessed at $250,000 for tax purposes locally, which assessment is further broken down by allocating a value of $200,000 to the land and $50,000 as the value for its \u201cimprovements\u201d, or structure. If the cost estimate to repair the structure damaged by the storm or flooding event equals or exceeds $25,000 (50 percent of $50,000), under NFIP-compliant flood mitigation or floodplain ordinances on the books at the local municipal level,the house is deemed to be \u201csubstantially damaged\u201d and must be repaired or rebuilt in accordance with the current flood ordinances and construction codes.<\/p>\n In the context of repairing or rebuilding \u201csubstantially damaged\u201d properties in post-disaster scenarios, however, the question then becomes \u2013 as it has now post-Sandy \u2013 which are the controlling \u201ccurrent flood ordinances and construction codes\u201d: Either those on the books pre-disaster, or those that are adopted by necessity post-disaster? Clearly, the latter comes into being locally in order to conform to revised or adjusted minimum standards and requirements for rebuilding \u2013 and thus become the new version of \u201ccurrent flood ordinances and construction codes\u201d \u2013 that will ensure one\u2019s ability to secure federally-backed, taxpayer-subsidized flood hazard insurance for the rebuilt structure. As described below, these determinations will depend on \u201cBFE\u2019s\u201d and especially newly released \u201cABFE\u2019s\u201d.<\/p>\n The Pertinent Acronyms – BFE\u2019s and ABFE\u2019s<\/span><\/strong><\/p>\n When first built or acquired, a residential home or commercial building located in a designated flood zone will have had a flood elevation certificate issued from the local flood mitigation officer on file that determined the minimum \u201cbase flood elevation\u201d above which the home or building was to be built \u2013 or was built \u2013 thus certifying that it was in conformance with the minimum standard for building elevation then prevailing.<\/p>\n The term \u201cbase flood\u201d means the flood has a 1 percent chance of being equaled or exceeded in any given year (formerly known as the \u201c100-year flood\u201d). The \u201cbase flood elevation\u201d (BFE) means the height at which there is a 1 percent or greater chance of flooding in any given year.<\/p>\n BFE\u2019s are established by FEMA as part of the NFIP. BFE\u2019s are depicted on Flood Insurance Rate Maps(FIRMS), and represent the minimum standard for building elevation requirements. The NFIP regulations require that new or reconstructed structures be elevated at or above the BFE. It is these standards that serve as the basis(es) for the adoption of floodplain management ordinances at the local level by municipalities. Of course, the development of floodplain management ordinances may still be subject to any supervening requirements the state may require, not only in respect of floodplain management but also the requirements of the statewide construction code(s) and any amendments or modifications the state may adopt or require in the actual repair, rebuilding or retrofitting process, post-disaster, to address and\/or forecast for damage prevention in the future.<\/p>\n NFIP regulations set forth at 44 CFR 60.1(d) state the NFIP criteria are minimum standards for the adoption of floodplain management regulations, and the municipalities may exceed, i.e, render higher or more stringent, the minimum criteria if they deem it necessary for more comprehensive and stricter floodplain management regulations. If more stringent requirements are adopted and imposed at the local and state levels, they will take precedence over the NFIP minimum standards. It is local community officials that have access not only to FEMA floodplain mapping data for the FEMA region at issue, but also, more importantly, knowledge of local conditions that may require, for human safety, higher standards than the minimum criteria.<\/p>\n Advisory Base Flood Elevations (ABFE\u2019s) are revised elevations depicted on maps that include geospatial layers and represent the new BFE for building and rebuilding1<\/a>. The ABFE\u2019s provide improved and updated flood hazard data created by FEMA in a post-disaster setting when the information on the FIRMS no longer accurately depicts an area\u2019s true flood risk \u2013 either because of the severity of the disaster in relation to the data available when the original BFE\u2019s were issued, intervening catastrophic events, or changes in coastal or flood plain areas. While they are described as \u201cadvisory\u201d, the reality is that they represent the new elevations that \u201csubstantially damaged\u201d structures will need to be raised to in any rebuilding scenario if a property owner has any hope of securing flood hazard insurance anew.<\/p>\n The Set-Up<\/span><\/strong><\/p>\n On Saturday, December 15, 2012, FEMA issued its new ABFE guidelines for the New Jersey and New York coastlines; and specifically, for Atlantic, Bergen, Burlington, Cape May, Essex, Hudson, Middlesex, Monmouth, Ocean and Union Counties in New Jersey, and for Bronx, Kings, New York, Richmond, Queens and Westchester Counties in New York.<\/p>\n FEMA reported that this information is intended to help communities and property owners make informed decisions about rebuilding their homes and businesses. The new maps have been released incorporate this advisory data. This information has resulted in new, higher flood elevations and\/or a new, higher risk flood zone designation. These flood elevations and flood risk zones affect the minimum building requirements in the communities and the flood insurance rates charged.<\/p>\n Now that the FEMA has released its long-awaited revised floodplain mapping and the new ABFE\u2019s, a quandary of revolutionary-esque proportions looms on the immediate horizon. As much as homeowners and coastal business property owners want to rebuild, the landscape is laden with a whole host of hidden trip-wires for the unwary that, without professional advice and navigation of or around them, will lead most property owners to an economic no-man\u2019s land.<\/p>\n At this juncture, two items have acute relevance and merit the immediate attention of legal, engineering and construction professionals alike. As they say, the devil is in the details.<\/p>\n First, FEMA\u2019s recently completed ABFE maps update mapping that was last completed more than 20 years ago. The new maps revise the risk assessment of flooding and flood damage in 120 communities in 10 New Jersey counties and six New York counties, with approximately 1,800 miles of coastline. FEMA spent the last two years creating these maps and new ABFE\u2019s, which were scheduled to be released in the spring of 2013, well before Superstorm Sandy even hit the radar screens or forecasts. However, in light of the impact of Sandy, FEMA determined it necessary and prudent to release the maps now in order to inform and assist the affected local communities plan their rebuilding initiatives, seek out federal mitigation financial assistance and, most likely along the way, amend local floodplain management ordinances and commensurate requirements of local building and construction codes in order to conform to the ABFE\u2019s. Such amendment and conformance, in turn, will ultimately meet as yet-to-be-determined NFIP requirements for the issuance of flood insurance; and, no doubt, establish significantly higher flood insurance premiums.<\/p>\n Second, the recently released maps and ABFE\u2019s neither accounted for nor were based upon the actual storm surge results of Superstorm Sandy. Nevertheless, a scrutinizing analysis of the new mapping and ABFE\u2019s reveals that the high risk flood zone designations have widened, and new BFE\u2019s will require the elevation of \u201csubstantially damaged\u201d structures anywhere from three to five feet higher, or even more than five feet depending on the area \u2013 or some other type or combination of flood damage mitigation methodology that will pass muster with FEMA.<\/p>\n Framing The Quandary<\/span><\/strong><\/p>\n Going back to the original example of the \u201csubstantially damaged\u201d home situated in a high risk flood zone having an assessment of $250,000, let\u2019s assume the home was located in an affected coastal town and had an original BFE was five feet. A review of the new flood zone mapping released on December 15th reveals that this very same property now has a new ABFE of nine feet. The homeowner and policyholder has met with his\/her flood insurance adjusters and the adjusters of the primary homeowner\u2019s insurance carrier, and is navigating the stressful process of negotiating and adjusting their loss claim. As they near \u2013 or think they are nearing \u2013 a settlement of the property damage claim that will yield them a draft or drafts for settlement proceeds, the homeowner is anxious to get about the task of hiring contractors to commence the repair and rebuilding process. This is where it gets sticky.<\/p>\n To get a permit to rebuild, one typically must first secure a flood elevation certificate from the local flood mitigation officer who is assigned the task of implementing and enforcing the municipality\u2019s local floodplain management ordinance. The issuance of a flood elevation certificate is a condition precedent to the issuance of a building permit by the local construction code official. Regardless of whether a homeowner has one that is still in effect, one that has expired since first issued or none at all, most flood mitigation officers in communities located in a designated flood zone have been hesitant post-Sandy to issue flood elevation certificates in the absence of further direction from the New Jersey Department of Community Affairs Division of Building and Construction Code Enforcement (DCA) and\/or New Jersey Department of Environmental Protection (NJDEP) at the state level. State regulatory officials have been hesitant to act or give guidance to local communities yet unless and until further direction is issued from FEMA. That is, until December 15th.<\/p>\n As previously noted, for nearly two years prior to Sandy, FEMA officials had been out and about the task of re-mapping and updating flood maps in the region where flood zones were created more than 20 years ago based upon data then available. The restudying effort included specifically areas of the New Jersey and New York coastlines shown of NFIP \u201cFlood Insurance Rate Maps\u201d, or \u201cFIRMS\u201d, for these areas. Before Sandy, while the re-mapping was finally completed, the updated FIRMS have yet to be finalized and will likely not be issued for at least another six to nine months from now. Nevertheless, because of Sandy, FEMA determined it imperative that ABFE\u2019s be provided to assist local municipalities, counties and the states of New Jersey and New York in devising and supporting the rebuilding effort.<\/p>\n Being ready to rebuild is one thing. Being able to actually rebuild is an altogether different predicament to overcome.<\/p>\n The Quandary<\/span><\/strong><\/p>\n Homeowners and owners of business properties located in a flood hazard zone that were \u201csubstantially damaged\u201d by Sandy now face this multi-faceted dilemma. The local flood mitigation officer, in conjunction with the municipality\u2019s engineering department, has inspected the property and made a determination that the structure is \u201csubstantially damaged\u201d. From the property owner\u2019s perspective, the questions then become:<\/p>\n What do I do? Do I have flood insurance coverage? If so, does my policy cover the added costs anticipated to raise or elevate my home or building to comply with the new ABFE\u2019s? If not, then what do I do?<\/p>\n Most properties located in designated flood hazard zones will likely have flood insurance, especially those that have been acquired, or built, and financed by banks or other lending institutions that require such insurance as a condition of a mortgage or business loan. The standard NFIP policy does contain coverage for just such a circumstance, which is known and referred to as Increased Cost of Compliance Coverage (ICC). The coverage, though limited to $30,000, if deemed applicable will be available to fund essentially four repair or rebuilding options.<\/p>\n Four Options Covered: Floodproofing, Relocation, Elevation, or Demolition (FRED, for short).<\/p>\n The four \u201cFRED\u201d options the policyholder can pursue to comply with his\/her\/its local community\u2019s floodplain management ordinance and help reduce future flood damage to the subject structure or building are described by FEMA as follows. As FEMA instructs, it is entirely up to the policyholder to decide which of these options is best suited (if even affordable):<\/p>\n See FEMA\u2019s NFIP publication entitled, “Increased Cost of Compliance Coverage \u2013 How You Can Benefit<\/a>.”<\/p>\n The Standard Flood Insurance Policy of the NFIP is issued to property owners through participating private carriers and is backed by FEMA. Its standard provisions for coverage also provide a limit of liability of up to $30,000 for increased cost of compliance on rebuild, and only applies to policies with building coverage.<\/p>\n However, getting up to $30,000 of coverage for \u201cincreased cost of compliance\u201d, the policyholder must still be able to withstand the application of the policy\u2019s \u201cexclusions\u201d. Excerpted below is a typical \u201cexclusions\u201d provision in a NFIP flood policy:<\/p>\n 5. Exclusions<\/em><\/p>\n Under this Coverage D \u2013 Increased Cost of Compliance, we will not pay for:<\/em><\/p>\n The harsh reality is that even if the policyholder can make a case to the flood insurance adjuster that none of these exclusions can or should be applied to the particular circumstances presented, the coverage is limited to $30,000. In all likelihood, that limit of coverage will be inadequate to fund the type of retrofitting or rebuilding methods required.<\/p>\n For example, if, in furtherance of FEMA\u2019s recently released flood zone re-mappings and ABFE\u2019s, the local municipality in a high risk flood hazard zone revises its floodplain management ordinances and\/or construction codes and in them adopts the new ABFE\u2019s, the ABFE\u2019s will become the controlling law at the local level. The municipality has the right to impose even greater or stricter standards than the minimum requirements suggested by the applicable, site-specific FEMA ABFE. As a result, the local flood mitigation officer, as a condition of (i) his\/her issuance of a flood elevation certificate (the condition precedent to the building permit) which, in turn is a condition of (ii) the local construction code\u2019s issuance of a rebuilding permit, and in conjunction with the construction code official, could very well require retrofitting substantially damaged structures, or even a rebuilding anew. Retrofitting or rebuild might conceivably involve such things as:<\/p>\n Performing even one, and certainly any combination of more than one, of these retrofitting methods might very well equal or well exceed the $30,000 limit of coverage for \u201cincreased cost of compliance\u201d. So, where does the extra funding come from? The typical policyholder would resist the notion of having to obtain a low-interest loan from the SBA, public or private sectors to fund the retrofitting\/rebuilding effort and thus add to existing mortgage indebtedness \u2013 assuming, of course, their mortgagees consented to subordinated encumbrances behind their positions. In the end, a homeowner or business property owner may very have no coverage or independent resources available to fund the obligatory increased cost of compliance; and, even if he\/she\/they did have the financial resources on-hand to do so, may very well think twice about actually rebuilding.<\/p>\n But here\u2019s the hidden Catch-22: Property owners can access ICC funding for the cost of elevating to the new Advisory BFE\u2019s\u00a0only if their municipality adopts the Advisory Maps<\/span>!<\/strong><\/p>\n Therein lies the quandary that FEMA\u2019s new ABFE\u2019s have placed homeowners and business-property owners in. It could not have been better described than by FEMA Hazard Mitigation Branch Deputy Director, Bill McDonnell, who, following FEMA\u2019s release of the new flood maps on December 15th, was quoted in one newspaper account thusly:<\/p>\n \u201cThere are a number of programs to assist in communities and individuals rebuilding. It\u2019s important that people know their risk, so they should look at the map that\u2019s available [ ] on the [FEMA] website. Then they need to make informed decisions and work with the resources available through their federal flood insurance, state, local and non-government agencies. Each individual must write their own recovery story; each individual makes a decision on how they are going to recover.\u201d<\/p>\n The clear lesson here: Before attempting to rebuild, it is imperative that property and business owners consult their legal, engineering and construction professionals, in conjunction with their local government officials, to determine the local building code, permit, and mandatory elevations requirements for repairing, retrofitting and\/or rebuilding.<\/p>\n Otherwise, in the zeal to rebuild, the disaffected property owner may be unwittingly punching a fast-track ticket for a ride to that economic no man\u2019s land.<\/p>\n\n
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