By Bradley S. Tennant, CRE, Esq.

After Hurricane Helene destroyed entire neighborhoods across the Gulf Coast of Florida, an intangible consideration moved front and center for many whose homes had been flooded – the FEMA 50% rule. Put simply, under federal guidelines enforced by the Federal Emergency Management Agency (“FEMA”) and the National Flood Insurance Program (NFIP”), if a home in a flood zone undergoes repairs or renovations the cost of which exceeds 50% of the structure’s value before the repairs are commenced,  then the repaired structure must comply with current flood regulations. In many circumstances, this can require raising the entire structure above the flood plain – an expensive proposition and a deal-breaker for many homeowners.

How this plays out is complicated, and there are multiple options for homeowners, but a simple way to consider the application is to compare the home’s assessed value to the cost of repairs. In Florida, many homes’ assessed values are limited by homestead protections, which cap increases in those values at 3% per year. Because home values have recently increased much faster than this growth rate, many people who had owned their homes for years had assessed values much lower than those of similar homes recently traded because the assessed value resets to the current market value when a property sells or is used as a rental property. Additionally, permitted renovations can also raise the assessed value over time.

This resulted in entire swaths of cities with a patchwork of houses in which many – if not most – had values so low that the 50% rule essentially proscribed repairs of the existing structures. The structures had to be demolished, and the homes sold only for their land values. Neighboring houses might have recently been sold, with room under the 50% rule to repair and save the homes. The market then reflected a stark divide – homes were being sold post-storm at significantly different values based on whether the 50% rule had been applied. Properties that could be repaired would sell at significantly higher values than homes that had to be razed.

This became an issue of intangible value – even when two properties were structurally identical, if a property’s assessed value was higher by virtue of a recent sale, it translated into a higher post-calamity sales price. Unlike zoning or other land-use-related limitations, value was created (or destroyed) by the actions of prior owners, but with no physical manifestation. While most wouldn’t criticize a homeowner for keeping their property taxes as low as possible, seeing the post-calamity results in the housing market demonstrates that value isn’t created from just what you can see and touch.

#Intangibles, #HurricaneHelene, #Homesales