After Hurricane Ian, Southwest Floridians began learning about a federal real estate requirement most of us didn’t need to know about before: the Federal Emergency Management Agency’s 50% rule. The rule is intended to make sure that after a natural disaster strikes, any repairs to or replacement of existing structures render the area’s stock of real estate more resistant to future events.
The rule applies to more than 21,000 communities nationwide that have entered into agreements with federal authorities to locally adopt and enforce a floodplain management program, which is intended to reduce future flood risk in designated Special Flood Hazard Areas, or SFHAs.
Local governments such as ours face strong incentives to establish and follow their respective floodplain management programs. Since the enaction of the Flood Disaster Protection Act of 1973—occasioned by Hurricane Agnes in 1972—FEMA now possesses the authority to issue insurance through the National Flood Insurance Program, or NFIP, only in communities that have adopted flood plain management programs.
Stated simply, property owners in areas designated as SFHAs can’t purchase flood insurance through the NFIP unless local officials comply by designing and enforcing floodplain management programs. This includes the regulations governing new development and repair to existing structures following a disaster, which brings us to the 50% requirement.
According to FEMA, if the estimated cost to repair a damaged structure in an SFHA exceeds 50% of the structure’s estimated market value before the repair, then the structure cannot be repaired. And, of course, any new construction replacing it is subject to current codes and requirements.
An example from the U.S. Department of Homeland Security Office of Inspector General is useful. Suppose following a natural disaster, the value of a damaged structure before any repair is estimated to be $100,000, while repairing the structure would cost $75,000. According to the 50% rule, the structure cannot be repaired.
Of course, the rule is intended to reduce future flood risk in SFHAs. But, as any good economist should ask, do the intended benefits of the rule outweigh its likely costs? And the answer to that critical question remains unclear.
One likely unintended consequence of the 50% rule is even greater and faster gentrification in affected areas—a phenomenon in which individuals with more financial resources acquire properties from current residents with fewer. Recent Florida-based research appearing in the Journal of Environmental Economics and Management suggests hurricanes displace low-income residents over time. Wealthier individuals are better positioned to navigate the 50% rule realities than low-income residents, for whom their damaged property was their sole dwelling.
Speculators can make offers to distressed residents that seem like salvation following a storm that leaves many either homeless or forbidden by the 50% rule from repairing their existing homes. The problem is likely compounded if a structure deemed “substantially damaged,” and thereby ineligible for repair, is a multifamily structure such as an apartment building. If the apartment building cannot be lawfully repaired, it could be purchased for redevelopment as either single-family structures or commercial use. And the 50% rule is mute on where such displaced families should go. The rule cares more about the resilience of structures than it does about the prospects of working families.
At a time when all of Southwest Florida claims to be desperate for “more affordable housing,” the 50% rule seems to work squarely against that goal.
Its other obvious costs lie in administration and compliance. Ian roared through at the end of September 2022, yet affected property owners are still working to understand what the rule is and how it affects them. In fact, I served as a panelist at a lunch event, hosted by the Chamber of Southwest Florida, at the end of March 2023. Its topic: “The 50% Rule Facts.” Residents are still struggling to be compliant, and so are local authorities who must answer to FEMA.
Good intentions often have unintended consequences. And the 50% rule seems full of them.
Victor V. Claar is associate professor of economics in the Lutgert College of Business at Florida Gulf Coast University. He serves as the George Gibbs Center for Economic Prosperity at the James Madison Institute adjunct director, and chairs the Freedom & Virtue Institute board.