Substantial Damage and Improvement

The questions and answers in this document are guidance materials designed for local building inspectors, zoning administrators, and other permit officials that enforce the floodplain management requirements of a community participating in the NFIP. Although this booklet is designed primarily for community permit officials, in certain situations the booklet's usefulness may be enhanced if it is also made available to owners of damaged structures. Therefore, community permit officials may choose to make some or all of the information in this booklet available to affected citizens immediately after a damage event.

Substantial Damage

As defined in 59.1 of the NFIP regulations, a building is considered to be substantially damaged when:

damage of any origin is 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.

  1. In terms of NFIP regulations, if a structure is determined to be substantially damaged, what must happen to that structure?
    All structures that are determined to be substantially damaged are automatically considered to be substantial improvements, regardless of the actual repair work performed. In other words, if the cost necessary to fully repair the structure to its before damaged condition is equal to or greater than 50% of that structure's market value before damages, then the structure must be elevated to or above the level of the base flood, and meet other applicable program requirements.
  2. When a structure is completely destroyed and a new structure is to be built on the old foundation or slab, is that structure considered a substantial improvement or new construction?
    It is considered a substantial improvement and termed a "reconstruction" since the old foundation has a residual value. However, it really does not matter whether it is referred to as new construction or a substantial improvement because in either case the structure will have to be elevated to or above the elevation of the base flood, and meet other applicable program requirements.
  3. What is the basis for determining a substantially damaged structure?
    The criteria for determining substantial damage is the ratio of the cost of repairing the structure to its before damaged condition to the market value of the structure prior to the damage (Note: The cost of repairs must include all costs necessary to fully repair the structure to its before damage condition)
  4. Who is responsible for making the determination whether a structure has been substantially damaged?
    Ultimately, it is the responsibility of the community permit official to assure that market value estimates are reasonably accurate and that the cost estimate reasonably reflects the actual costs to fully repair the damage and make any other improvements to the structure. However, the local permit official may require that the permit applicant or owner of the building supply the information necessary (e.g., appraisals, construction costs estimates, etc.). 
  5. How much accuracy is needed in determining whether a structure is substantially damaged?
    The closer the level of improvement or damage appears to approach 50% of the market value of the structure, the greater the precision needed in determining substantial improvement. For example, if the damage sustained (or cost of full repair) relative to market value is thought to be minor (less than 40%) or extensive (greater than 60%), then more approximate methods for determining substantial improvement may suffice. In contrast, if the ratio is suspected to be between 40% and 60%, then detailed, itemized estimates for the cost of repair and definitive estimates of market value must be used.

Substantial Improvement

Substantial improvement, as defined in 44 Code of Federal Regulations 59.1 means:

any reconstruction, rehabilitation, addition, or other improvement of a structure, the cost of which equals or exceeds 50 percent of the market value of the structure before the "start of construction" of the improvement. This term includes structures which have incurred 'substantial damage', regardless of the value of or actual cost of repair work performed. The term does not, however, include either (1) any project for improvement of a structure to correct existing violations of state or local health, sanitary, or safety code specifications which have been identified by the local code enforcement official and which are the minimum necessary to assure safe living conditions or (2) any alteration of a 'historic structure', provided that the alteration will not preclude the structure's continued designation as a 'historic structure'.

  1. Why was the 50% figure chosen as the substantial improvement threshold?
    The 50% threshold was chosen as a compromise between the extremes of prohibiting all investment to structures in flood hazard areas which do not meet minimum FEMA floodplain management requirements and allowing structures to be improved in any fashion without regard to the hazard present. In the first alternative there is the potential for causing hardship to those who have located in flood hazard areas without knowledge of the risk because the structure was constructed prior to the designation of the area as flood prone. These individuals could not improve their structures as damage or age contributed to their deterioration. The second alternative provides no mechanism to ensure that increased investment in flood hazard areas will receive needed protection from the flood risk, thus contributing to the increased peril to life and property. The threshold is thus a compromise at a half-way point and was chosen because it conforms with similar building code and zoning standards that also use a 50% threshold.
  2. In terms of NFIP regulations, if a structure is determined to be substantial improvement what must happen to that structure?
    A substantially improved structure must be brought into compliance with NFIP regulations and other requirements in the local ordinance for new construction; that is, the structure must be elevated to or above the level of the 100-year or base flood, and meet other applicable requirements.
  3. If a structure is substantially damaged and is not brought into compliance with community floodplain management regulations, how will that impact on Flood Insurance rates and premiums?
    If a structure is substantially damaged or otherwise substantially improved, it becomes a Post-FIRM building and is actuarially rated based on its risk of flooding. The rate is established based on the elevation of the structure's lowest floor in relation to the base flood elevation (BFE). If the lowest floor is elevated to or above the base flood elevation * * * the resulting premium in an A-zone will generally be lower than a premium based on Pre-Firm rates
    If the structure is rebuilt in violation of the community's floodplain management regulations and not elevated * * * the Post-FIRM rates and premiums will be significantly higher than Pre-FIRM rates and premiums. For substantially damaged structures which have their lowest floors several feet or more below the base flood elevation, the annual premium could increase to thousands of dollars.
  4. What types of structures so the substantial improvement requirements apply to?
    The substantial improvement requirements apply to two different types of structures:
    All existing (or pre-FIRM) structures; These structures were already present at the time a community adopted a floodplain management ordinance and a Flood Insurance Rate Map (FIRM) allowing it to enter the Regular Phase of the NFIP. Many existing structures do not meet Program building requirements but are "grandfathered" into the program.
    New construction (post-FIRM structures) in communities that have undergone map revisions resulting in areas with more restrictive zone designations or increased BFEs. Substantially improved post-FIRM structures located in areas affected by map revisions must be brought into compliance with regulations applicable for the zone designations and BFEs which became effective after the structure was built
  5. What are some examples of the ways in which structures can be substantially improved?
    Generally, structures are substantially improved in one of four ways:
    Rehabilitations - improvements made to an existing structure which do not affect the external dimensions of the structure;
    Additions - improvements that increase the square footage of a structure. Commonly this includes the structural attachment of a bedroom, kitchen, den, recreational room, or other type of addition to an existing structure;
    Reconstructions - cases where an entire structure is destroyed by damage or is purposefully demolished or razed and a new structure is built on the old foundation or slab;
    Substantial Damage - structures that are considered substantial improvements when they incur substantial damage (Although this document primarily addresses substantially damaged structures, it should be noted that substantial improvement more commonly occurs in non-disaster, everyday situations through the rehabilitation of, or addition to, structures)

Substantial Damage and Improvement Structure FAQ's

  1. How should the market value of a structure be determined?
    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. For determining substantial improvement, the value of the land must always be subtracted. As indicated in the list, some market value estimates should only be used as screening tools to identify those structures where the substantial improvement ratios are obviously less than or greater than 50% (e. g., less than 40% or greater than 60%). For structures that fall between the 40% and 60% range, more precise market value estimates should be used.
    • Acceptable estimates of market value can be obtained from the following sources
    • Independent appraisals by a professional appraiser
    • Detailed estimates of the structure's Actual Cash Value (used as a viable substitute for market value based on the preference of the community)
    • Property appraisals used for tax assessment purposes (Adjusted Assessed Value: used as a screening tool; see Question #22)
    • The value of buildings taken from NFIP claims data (used as a screening tool)
    • "Qualified estimates" based on sound professional judgment made by staff of the local building department or local or State tax assessor's office
  2. If property appraisals used for tax assessment purposes are to be used to determine market value, what are some of the limitations that should be considered?
    FEMA promotes the use of adjusted assessed value as a screening technique for separating out structures that are obviously less than or greater than 50% damaged. This screening technique is applicable for cases where the ratio of cost of repair to market value (adjusted assessed value) is significantly less or greater than 50%. However, in post-disaster situations where no other market value estimates are available or where permit applications are overwhelming, adjusted assessed values may have to suffice as the definitive estimate of market value.
    The use of assessed value has some limitations that, if not considered and accounted for, can produce erroneous estimates of market value. These limitations are:
    • Appraisal Cycle: How often are the appraisals done and when was the date of the last appraisal? Market value estimates can be grossly outdated if the cycle is long and the community happens to be in the latter stage of its cycle and has not been appraised for many years
    • Land Values: In most cases, land values and the value of improvements (structures) thereon will be assessed separately and listed as such on the tax roles. In cases where they are not distinguished, a determination of the value of the land will have to be made and subtracted from the total assessed value
    • Assessment Level: States and local taxing jurisdictions vary in assessment levels (an established statutory ratio between the assessor's estimate of value and the true fair market value). For example, many states use an assessment level of 90%. In this case the assessed values will under estimate market values by 10%
      In cases where the assessment level is unacceptably low or where the projected ratio of cost of repair to market value is close to 50%, adjustments for assessment level must be made. If the use of assessed value is questioned, an appeal is warranted, but the burden of proof can be placed on the permit applicant who can be required to submit an independent appraisal by a qualified appraiser.
  3. Can replacement cost be substituted for market value when determining whether a structure was substantially damaged?
    No. Replacement cost is the cost of replacing a structure with a structure of a like kind using present day costs for labor and materials. In the majority of cases replacement cost is much greater than the market value of a structure. The use of replacement cost would make the substantial improvement definition much less restrictive (because it increases the second number in the ratio, it effectively raises the threshold to greater than 50% of market value). Therefore, replacement cost should not be used as a simple substitute for market value. Replacement cost may be used to estimate market value if the value of the depreciation of the structure is subtracted. 
  4. What happens when a structure is damaged, but not substantially, and during the repair the owner also makes an addition, rehabilitation or other improvement to the structure?

    It is not uncommon for a home owner who has sustained damage to his/her structure to decide to simultaneously improve the structure while repairs are being made. For example, the owner of a building which was 30% damaged in a flood will, while repairing the damage, have an additional room (30% improvement) constructed. Under circumstances where two types of improvements (e.g., an addition and repair due to damage as given above) are made to a structure, and the combined total of these improvements is equal to or greater than 50% of the structure's pre-damage market value, the structure is considered a substantial improvement.

  5. What if a building is substantially damaged but not fully restored or is repaired using donated or discounted labor and/or materials such that less than 50% is actually spent on repairs?
    By definition, the term substantial damage refers to the repair of all damages sustained and cannot reflect a level of repairs which is less than the amount of damages suffered. Thus, a building which sustains damages equal to or exceeding 50% of its market value is a substantial improvement, even if the actual "out-of-pocket" expenditures for the repair are reduced below the 50% threshold or if the structure is not fully repaired.

  6. How are estimates for donated or discounted materials determined?
    The value placed on materials should be equal to the actual or estimated cost of all materials to be used or considered necessary in repairing all damages sustained by a building and should be no less than that required to restore the building to its pre-damaged condition. Where materials or servicing equipment are donated or discounted below normal market values, the value should be adjusted to an amount which would be equivalent to that estimated through normal market transaction. These adjustments and estimates should be made by the local permit official based on his professional judgment and knowledge of the local or regional cost of construction materials and servicing equipment.

  7. How are estimates for self or volunteered labor determined?
    The value placed on labor should be equal to the actual or estimated labor charge for repair of all damages sustained by the structure. Where non-reimbursed labor is involved the value of the labor should be estimated based on applicable minimum-hour wage scales for the type of construction work that is done. This estimate should be made by the local permit official based on his professional judgment and knowledge of the local or regional wage scales for various types of construction work.

  8. What items can be excluded from the cost of repair?
    Items that should not be counted toward the cost of repair include plans, specifications, survey and building permits, and other items which are separate from or incidental to the repair of the damaged building.

  9. Why should an owner suffer what seems to be a penalty for upgrading and improving a structure?
    The underlying principal for counting the extra costs associated with more expensive materials, labor, or design is the added real property that would be located in flood hazard areas and that would be at risk to flood damage. It should be noted that in some form, the Federal Government (the NFIP or various Federal disaster assistance programs) would likely be obligated to pay a portion of or all future damages to these more expensive improvements. In addition, structures located in flood hazard areas which are not elevated to or above the base flood elevation pose threats to the health and safety of the occupants of these structures. Over time it is not only important to protect the property of existing structures through substantial improvement, but also to protect the health and lives of the public citizens that occupy them.

  10. If a community has adopted a cumulative permit tracking system for administering substantial improvement, what are the implications for substantially damaged structures in a post-disaster situation?
    Some communities [but not Palo Alto] have adopted ordinances which contain substantial improvement definitions that require all improvements to be added in a cumulative manner over the life of the structure or some other set period. When the combined total of all previous improvements or repairs made during the specified time equals or exceeds 50%, the structure is considered a substantial improvement. In such a system, structures do not necessarily have to be substantially damaged to be considered substantial improvements. 


In post-flood disaster situations, many permits for repair due to damage must be processed in a relatively short period of time.

What does FEMA accept as reasonable sources for determining the cost to fully repair a damaged structure?

Acceptable estimates of "cost of repair" or damage sustained can be obtained from the following sources:

  1. Itemized estimates made by licensed contractors or other professional estimators in the construction industry (Note: all estimates should be submitted to [Palo Alto Public Works Engineering] for review and must be itemized for both materials and labor)
  2. For insured structures damaged by floods, the monetary damage estimated by the NFIP claims adjustor (structure only, not contents). Claims estimates of the damage sustained should be used primarily as a screening method to determine if a structure has been substantially damaged
  3. "Qualified estimates" of the amount of damage sustained or cost of repairs can be made by the local building permit department using professional judgment and knowledge of local and regional construction costs. Methods for making "qualified estimates" are prescribed in handbooks
  4. Building code valuation tables published by the major building code groups (BOCA, SBCCI, ICBO). These tables can be used for determining estimates for particular replacement items if the type of structure in question is listed in the tables
  5. Damage assessment field surveys conducted by building inspection departments, emergency management or tax assessment agencies, or other professional State or local officials. Such damage assessments should estimate the total monetary damage sustained to the structure


For activities in flood hazard areas, what does the NFIP require in the way of permits?

Section 60.3(a)(1) states that communities participating in the NFIP shall "require permits for all proposed construction or other development in the community, including the placement of manufactured homes, so that it may determine whether such construction or other development is proposed within flood-prone areas. For the purposes of this requirement the NFIP definition of "development" found in Section 59.1 "means any man-made change to improved or unimproved real estate, including but not limited to buildings or other structures, mining, dredging, filling, grading, paving, excavation or drilling operations or storage of equipment or materials." Thus, under the NFIP a community is responsible for requiring permits for all development, not just structures.

How does this development permit procedure relate to substantial improvement?

Section 60.3(a)(3) states that NFIP communities, as part of the development permit process, shall "review all permit applications to determine whether proposed building sites will be reasonably safe from flooding." And, "if the proposed building site is in a flood-prone area, all new construction and substantial improvements shall meet all of the floodplain management requirements of the NFIP such as proper anchoring and elevation or floodproofing of structures to or above the BFE."

Due to the trauma and inconveniences which occur to the victims during and after a disaster, can permit requirements for the repair of damaged structures be suspended in post-flood situations?

No. Despite pressures from citizens and local politicians after a disaster, under no circumstances should permit officials suspend permit requirements for the repair of damaged structures. Only through proper permitting procedures can compliance with local and state codes and regulations, including those of the NFIP contained in a Community's floodplain management ordinance, be assured. Substantially damaged structures repaired without a permit could jeopardize a community's standing in the NFIP and possibly result in a community being placed on probation and suspended from the program. In addition, residences located in flood hazard areas which are not elevated to or above the BFE pose threats to the health and safety of the occupants of these structures. Over time it is not only important to promote the protection of the property of existing structures through the enforcement of substantial improvement, but also to protect the health and lives of the public citizens that occupy them. The suspension of permit requirements would seem to be a personally compassionate gesture during a flood victims' time of distress. By not requiring compliance with existing health and safety requirements (such as elevation to or above the BFE as required by substantial improvement) communities only set the stage for similar and probably worse damages and safety threats to occur during the next disaster

However, in order to appear responsive to the needs of the citizenry which requested suspension of permit requirements, local officials may choose to waive permit fees in a post-flood situation. Although permit fees are seldom a significant cost of repair, suspension of these fees often makes the permit requirements somewhat more palatable to the victims.

Due to the trauma and inconveniences which occur to the victims during and after a disaster, can variances be issued for substantially damaged structures?

The burden of determining that an applicant qualifies for a variance rests with the community. But, absolutely no variances should be issued for substantially damaged structures unless the following FEMA variance criteria contained in 60.6(a) of the regulations are met:

  1. The applicant has good and enough cause for requesting a variance
  2. The applicant will suffer exceptional hardship should the variance be denied
  3. The variance will not cause increased flood heights, additional threats to public safety, extraordinary public expense, create nuisances, cause fraud on or victimization of the public, or conflict with existing local laws or ordinances
  4. The variance is the minimum necessary, considering the flood hazard, to afford relief

It should be noted that the exceptional hardship referred to in criteria number two above applies to the physical characteristics of the property in question, not to economic or other personal hardships of the owner or inhabitants of the structure. Though standards vary from state to state, in general, a properly issued variance is granted for a parcel of property with physical characteristics so unusual that complying with the community's floodplain management ordinance would create an exceptional hardship to the owner or surrounding property owners. Those characteristics must be unique to that property and not be shared by adjacent parcels. The unique characteristic must pertain to the land itself, not to the structure, its inhabitants, or the property owners

It should also be noted that the standards listed above are the same variance standards that must be met in all other non-disaster variance situations. The fact that it is a post-disaster situation does not lessen or change the variance standards. On the contrary, where structures have suffered severe (substantial) damage, FEMA considers it highly unlikely that variance requests can meet the above criteria and be granted.