50% FEMA Rule Appraisal, Substantial Improvement Valuation

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The maximum improvement that can be made to the property without having to meet the FEMA Flood plain criteria is 50% of the value of the improvements. 

If the cost of improvements or the cost to repair the damage exceeds 50 percent of the market value of the building, it must be brought up to current building codes including floodplain management standards.  Thus, many property owners opted to do the renovation or damage repair not to exceed the 50% threshold.  Most jurisdictions adopted the rule of 50% of the market value of the existing building improvements in the case of additional renovation, repair, or damage mitigation. 

We can help assist you with your Substantial Improvement or 50% FEMA Rule Appraisal. The purpose of a 50% FEMA Rule is to promote redevelopment at or above the base flood elevation.  In order to overcome this issue, one must determine the depreciated value of the improvements or the actual cash value (ACV) of the structure.  Land value is not considered.  Local building departments require a 50% FEMA Rule Appraisal or as it is often referred to an Actual Cash Value Appraisal of the improvements to determine if the scope of work on the commercial or residential property will be a Substantial Improvement.  

That means an existing building must meet the requirements for new construction.  People who own existing buildings that are being substantially improved will be required to make a major investment in them in order to bring them into compliance with the law. 

"Substantial improvement" means any construction, rehabilitation, addition or other improvement to a structure, the total cost of which equals or exceeds 50% of the market value of the structure before the start of construction of the improvement.

The cost of the project means all structural costs, including

• all materials

• labor

• built-in appliances

• overhead

• profit

• repairs made to damaged parts of the building worked on at the same time

In common parlance, market value is the price a willing buyer and seller agree upon. The market value of a structure reflects its original quality, subsequent improvements, physical age of building components and current condition.

However, market value for property can be different than that of the building itself. Market value of developed property varies widely due to the desirability of its location. For example, two houses of similar size, quality and condition will have far different prices if one is on the coast, or in the best school district, or closer to town than the other—but the value of the building materials and labor that went into both houses will be nearly the same.

For the purposes of determining substantial improvement, market value pertains only to the structure in question. It does not pertain to the land, landscaping or detached accessory structures on the property. Any value resulting from the location of the property should be attributed to the value of the land, not the building.

Items to be included

— All structural elements, including:

— Spread or continuous foundation footings and pilings

— Monolithic or other types of concrete slabs

— Bearing walls, tie beams and trusses

— Floors and ceilings

— Attached decks and porches

— Interior partition walls

— Exterior wall finishes (brick, stucco, siding) including painting and moldings

— Windows and doors

— Re-shingling or retiling a roof

— Hardware

— All interior finishing elements, including:

— Tiling, linoleum, stone, or carpet over subflooring

— Bathroom tiling and fixtures

— Wall finishes (drywall, painting, stucco, plaster, paneling, marble, etc.)

— Kitchen, utility and bathroom cabinets

— Built-in bookcases, cabinets, and furniture

— Hardware

— All utility and service equipment, including:

— HVAC equipment

— Plumbing and electrical services

— Light fixtures and ceiling fans

— Security systems

— Built-in kitchen appliances

— Central vacuum systems

— Water filtration, conditioning, or recirculation systems

— Cost to demolish storm-damaged building components

— --- Labor and other costs associated with moving or altering undamaged building

components to accommodate improvements or additions

— --- Overhead and profits

Items to be excluded

— Plans and specifications

— Survey costs

— Permit fees

— Post-storm debris removal and clean up

— Outside improvements, including:

— Landscaping

— Sidewalks

— Fences

— Yard lights

— Swimming pools

— Screened pool enclosures

— Detached structures (including garages, sheds and gazebos)

— Landscape irrigation systems

"Substantial damage" means damage of any origin sustained by a structure whereby the cost of restoring the structure to its before damaged condition would equal or exceed 50 percent of the market value of the structure before the damage occurred.

Two key points:

• The damage can be from any cause—flood, fire, earthquake, wind, rain, or other natural or human-induced hazard.

• The substantial damage rule applies to all buildings in a flood hazard area, regardless of whether the building was covered by flood insurance.

An independent appraisal by a professional appraiser. The appraisal must exclude the value of the land and not use the “income capitalization approach” which bases value on the use of the property, not the structure.

We have helped numerous cases of 50% FEMA Rule Appraisal or "SUBSTANTIAL IMPROVEMENT" COST APPRAISAL MARKET VALUATION.  One of cases was the national Fortune 50 Company want to renovate a distribution facility that the cost of renovation was about $9.5 million that the existing building value should exceed more than $19 million in order to proceed without meeting the new building codes.  One of other cases was the hotel closed down and an investor wants to renovate spending $12 million to place one of the national brand hospitality franchise that the existing building value should not exceed more than $24 million.  

We can help to justify and meet with the local building "50% FEMA Rule Appraisal" or "substantial improvement" compliance.

Find out more calling David Hahn at 503-457-1940 or email at david@oregonvaluation.com.