Understanding the FEMA 50% Rule

Following Hurricanes Helene and Milton, impacted homeowners have received correspondence from their local building officials notifying the homeowners that their property is affected by the 50% Rule.  Sometimes these are referred to as substantial damage determination letters. Below is a series of frequently asked questions and answers regarding the 50% Rule and properties that are substantially damaged by flood. 

1. What is the FEMA 50% Rule?

When structures located in a Special Flood Hazard Area (SFHA) are damaged, local communities that participate in the National Flood Insurance Program (NFIP) are responsible for assessing impacts before repairs can be made. NFIP flood insurance and certain types of federal financial assistance are available only in communities that enter into agreements with FEMA to regulate flood hazard areas. More than 22,000 communities participate in the NFIP. These participating communities must adopt and enforce regulations and codes that apply to development in SFHAs.

A structure is considered Substantially Damaged (and thus requires Substantial Improvement) if the cost to repair is 50% or more of the market value of the structure. The 50% standard is the NFIP minimum, and a state or community floodplain management regulations or building code could adopt a more restrictive threshold (such as 30% or 40%). Once a structure is determined to be Substantially Damaged, the structure must be brought into compliance with current local floodplain management standards, which may include, among other things, elevating the structure, using flood-resistant materials, proper flood venting, or demolition and reconstruction. The Substantial Damage requirements were designed to address the large numbers of structures already located in SFHAs before communities joined the NFIP.

A structure that is completely destroyed is a substantially damaged structure, and any re-construction must comply with the current floodplain management guidelines and building codes applicable to new construction.

2. Who makes the Substantial Damage determination and how is it made?

Substantial Damage/Substantial Improvement determinations are made by the local officials who are responsible for administering their floodplain management regulations or codes.

Communities have choices about how to handle making substantial damage determinations when many buildings have been damaged by a significant event:

• They can proactively inspect buildings soon after the event and use available information to estimate repair costs and market values; the data can then be used to develop substantial damage determinations in advance of owners submitting applications with more detail (note: this option is preferred by FEMA and is often implemented by communities); or

• They can notify owners of the requirement to get permits and then wait for property owners to apply for permits and make substantial damage determinations at that time, following their normal permit review procedures.

3. How is the Substantial Damage determination calculated?

Local officials take the following steps to calculate Substantial Damage/Substantial Improvement: (1) determine the cost of repair work; (2) determine the market value of the structure; (3) divide the cost of repair by the market value; (4) provide Substantial Improvement/Substantial Damage determinations to property owners; and (5) require owners to obtain permits to bring Substantially Improved/Substantially Damaged structures into compliance with the floodplain management requirements.

Property owners may appeal decisions by providing additional information, particularly when estimates of costs and market values are used to make determinations.

4. What is Market Value?

The NFIP does not define the term “market value.” Generally, though, it is the price a structure would bring in a transaction between a willing buyer and seller on the open market. Note: Replacement cost cannot be used in place of market value.

5. What costs are included in determining Substantial Damage?

• Materials and labor (including donated/discounted materials and owner/volunteer labor)
• Structural elements
• Demolition and debris disposal
• Contractor overhead or profit
• Utility and service equipment – HVAC, plumbing, wiring, built-in appliances, fixtures
• Elevation or floodproofing
• Site preparations
• Costs associated with complying with regulations or code requirements
• Interior and exterior finishes

6. What prior “improvements” count towards the Substantial Improvement/Substantial Damage calculation? 

Each participating community sets a “lookback” period to decide what improvements will count towards the calculation. Some require the cost of any improvements made over the past 24 months to be included in the calculation, while others have lookback periods of five years.

“Improvements” include any work on a building or manufactured home, regardless of the type of work (or what it is called), including rehabilitation and remodeling; lateral additions and vertical additions; repair, reinforcement, or replacement of foundations; repair of damaged buildings; reconstruction of demolished or destroyed buildings; work on compliant buildings; and work on buildings where flood maps have been revised. 

For more information on what may count as an “improvement,” please review Section 6.4 of FEMA’s Substantial Improvement/Substantial Damage Desk Reference.

7. What items can be excluded from the cost of repair?

Items that should not be counted toward the cost of repair include:

• Plans, specifications, surveys, building permits, and other items separate from or incidental to the repair
• Clean-up and trash removal
• Carpeting
• Outside improvements to the land, such as landscaping, driveways, pools, seawalls, etc., are not included in the 50% Rule value
• Appliances that are not built-in

Note: Even if an owner proposes to perform less than all of the work necessary to repair the damage completely (or proposes to do the work in phases), the local officials must make the determination based on the cost to fully repair and restore the structure to its pre-damage condition.

8. What if during repairs to a structure that was not substantially damaged, the owner wants to make other improvements to the structure?

The combined costs of all work (repair and improvement) must be used to make the Substantial Improvement/Substantial Damage calculation. The combined estimated costs for all costs to repair structures and all costs of proposed improvements must be provided to the local government. The combined total cost is compared to the pre-damage or pre-improvement market value of the structure to make the Substantial Improvement/Substantial Damage determination. The cost of the additional work must be added to the costs used in the initial determination, and the local official must reevaluate the Substantial Improvement/Substantial Damage determination. If the combined repairs and improvements constitute Substantial Improvement, then the structure must be brought into compliance.