Codes and Standards – 50 Percent Rule

Appeal Brief

Summary Paragraph

Appeal Letter

Appeal Analysis

Background

From October 26 to November 8, 2012, Hurricane Sandy caused damage to the Police and Municipal Buildings located in the Borough of Lavallette (Applicant), New Jersey.  To document the estimated costs to repair these buildings to pre-disaster condition and replace damaged contents, FEMA prepared Project Worksheet (PW) 440. 

The Applicant subsequently requested approval for an improved project that proposed to demolish both buildings and replace them with a single facility.[1]  After FEMA approved the improved project request and capped funding based on the repair estimates,[2] the Applicant requested that FEMA base funding on estimated costs to replace both buildings.[3]  FEMA denied this request, finding that the Applicant’s floodplain administrator had incorrectly determined the buildings were substantially damaged.[4]  FEMA held that substantial damage is determined only when repair costs exceed 50 percent of the market value, and in this case, the elevation costs were incorrectly included as part of repair costs.[5]  As the estimated repair costs alone did not exceed 50 percent of the buildings’ market values, FEMA determined the buildings did not meet the definition of substantially damaged, and thus elevation was not required.[6]    

First Appeal

The Applicant appealed, arguing that FEMA incorrectly excluded elevation-related costs in the substantial damage calculation.[7]  To support this argument, the Applicant contended that certain New Jersey Building Codes required elevation,[8] and it cannot avoid elevation costs in completing repairs to the damaged facilities.  Accordingly, the Applicant argued the floodplain administrator correctly included elevation costs in the substantial damage calculation and such costs should be eligible.  The Applicant further argued that because the facilities support critical actions, FEMA is required to reimburse costs to elevate to the 500-year flood elevation pursuant to a similar substantial improvement calculation.

The Applicant separately argued that it should be reimbursed estimated costs to replace the buildings because, pursuant to FEMA’s 50 Percent Rule, repair costs exceed 50 percent of replacement costs.  The Applicant contended that elevation costs should be included in the numerator of the 50 Percent Rule’s calculation because the codes requiring elevation applied to damaged elements of the buildings.  Additionally, the Applicant argued that, should the floodplain administrator determine a facility is substantially damaged, FEMA is required to include the elevation costs in the numerator of the 50 Percent Rule calculation.  In further support of this argument, the Applicant argued that FEMA effectively established a precedent that elevation costs must be included in the numerator per the Agency’s resolution of a funding dispute to repair the University of Iowa’s Arts Building.[9] 

Finally, the Applicant argued that the New Jersey Uniform Construction Code[10] requires elevation, and the costs are eligible regardless of any determinations on proper application of the 50 Percent Rule or the floodplain administrator’s substantial damage calculation.  The Applicant contended that without elevation, it could not obtain a building permit or occupancy permit—arguing the buildings would not be able to function as they did immediately before the disaster and therefore make replacement costs eligible.

The Grantee forwarded the Applicant’s first appeal to FEMA on June 17, 2015.  On November 20, 2015, FEMA sent a Final Request for Information (RFI) to the Applicant.  The Applicant responded on January 7, 2016, and stated that it would not be providing any additional information or documentation.

The FEMA Region II Regional Administrator (RA) denied the first appeal on February 26, 2016, determining that the floodplain administrator incorrectly included elevation costs in the substantial damage calculations, while the correct calculations yielded results well below the 50 percent threshold needed for a substantial damage finding.  The RA concluded that the elevation requirement found at Title 7, Chapter 13 of the New Jersey Administrative Code, was not applicable because the prior version of this code did not contain an elevation requirement.  Therefore, the elevation requirement was not applicable because it had not been formally adopted and implemented at the time of the disaster.  For the same reasons, the RA determined that the repairs did not qualify as substantial improvements to a critical action facility that would require elevation to the 500-year flood elevation.  Additionally, the RA concluded the code applies to newly constructed, reconstructed, or otherwise substantially improved buildings, but not to repairing a facility’s components to their pre-damage condition.  The RA also relied on FEMA DAP 9524.4 and its subsequent policy clarification memorandum[11] to determine that proper application of FEMA’s 50 Percent Rule excludes costs associated with upgrades triggered by local codes and standards as well as floodplain management ordinances requiring upgrades to an entire facility from the repair costs included in the numerator.[12] 

In response to the Applicant’s argument regarding the Iowa Arts building, the RA noted that the 2015 DAP 9524.4 policy clarification memorandum was not in effect at the time FEMA resolved the Arts building dispute.[13] 

Second Appeal

In its second appeal, dated April 12, 2016, the Applicant reiterates the same arguments made on first appeal.  Additionally, the Applicant contends that FEMA incorrectly applied the term “reconstruction,” and thus erred in determining elevation was not required, asserting that elevation was required separate, and apart from any determination that repairs are in excess of 50 percent of the replacement cost.  To support this argument, the Applicant points to a definition of “reconstruction” found in the Uniform Construction Code, contending it was in effect at the time of the disaster and requires elevation.[14]  

Furthermore, the Applicant also argues that the clarification memorandum regarding Disaster Assistance Policy (DAP) 9524.4, Repair vs Replacement of a Facility under 44 C.F.R. § 206.226(f) (The 50 Percent Rule), which clarified that elevation costs should not be included in the numerator, was not issued until after the disaster and first appeal.  Therefore, FEMA is attempting to apply a policy published after the disaster.  The Applicant asserts application of the policy would lead to an unequitable outcome.

The Grantee concurred and forwarded the Applicant’s second appeal on June 6, 2016.

Discussion

Substantial Damage Determination

The Applicant contends the floodplain administrator correctly determined elevation costs were part of required repair costs and did not err by including them in the numerator of the substantial damage calculation.

The Applicant did not reference specific provisions within its local codes that would govern the floodplain administrator’s substantial damage determination pursuant to the National Flood Insurance Program (NFIP).  Nevertheless, governmental entities who participate in the NFIP must adopt certain minimum floodplain management requirements,[15] which includes the requirement that any structures that sustain “substantial damage”[16] are elevated so that the lowest floor is above the base flood elevation, flood proofed, or otherwise brought into compliance with other similar requirements.[17]  “Substantial damage” means damage of any origin sustained by a structure whereby the cost of restoring the structure to its before-damage condition would equal or exceed 50 percent of the market value of the structure before the damage occurred.[18]  Additionally, any substantial improvement[19] to a structure that performs a critical action requires elevation of the structure above the 500-year flood elevation.[20]

Here, estimated repair costs do not exceed 50 percent of the market values, unless elevation costs are included as repair costs.  The Applicant contends that its code provisions[21] require it to elevate each building, and further asserts that the resulting elevation costs are part of repair costs for purposes of the substantial damage determination.  This line of reasoning, however, relies on the proposition that there is a code provision requiring elevation.  As explained by the RA, the Flood Hazard Area Control Act Rules located at Title 7 Chapter 13 of the New Jersey Administrative Code requires elevation when a building is “reconstructed,”[22] which means “greater than 50 percent of a structure is replaced.”  “Repair” is defined as meaning “no more than 50 percent of the structure is replaced.”[23]  As the buildings in question do not need more than 50 percent of their structures replaced, they meet the definition of repair, and accordingly do not meet the definition of reconstruct.  Moreover, to meet the definition of reconstruction outlined in Title 7 Chapter 13, the size, shape, and location of the structure must be altered.[24]  In this instance, the approved Scope of Work involves repairs, which do not involve alterations to either the sizes, shapes, or locations of the respective buildings.  Accordingly, New Jersey Administrative Code does not require elevation, and the floodplain administrator incorrectly determined the buildings were substantially damaged by including elevation costs as part of the repair costs within the calculation.

For the same reasons discussed in the prior paragraph, the repairs do not qualify as substantial improvements to a critical action facility that would require elevation to the 500-year flood elevation. 

Codes and Standards

The Robert T. Stafford Disaster Relief and Emergency Assistance Act § 406 and implementing regulations authorize FEMA to provide federal assistance to a local government for the repair, restoration, or replacement of a facility damaged by a declared disaster and in conformity with current applicable codes, specifications, and standards.[25]  The regulations define “standards” as codes, specifications, or standards required for the construction of facilities.[26] 

In order for FEMA to reimburse costs of federal, state, and local repair or replacement codes or standards, the codes or standards must (1) apply to the type of repair or restoration required; (2) be appropriate to the predisaster use of the facility; (3) be found reasonable, in writing, and formally adopted and implemented by the state or local government on or before the disaster declaration date or be a legal federal requirement applicable to the type of restoration; (4) apply uniformly to all similar types of facilities within the jurisdiction of owner of the facility; and (5) be enforced during the time standards were in effect.[27]  All five prongs must be met in order for a damaged facility to be eligible for PA funding.[28] 

The Flood Hazard Area Control Act Rules located at Title 7 Chapter 13 of the New Jersey Administrative Code do require elevation in certain circumstances.[29]  However, the requirement to elevate is dependent on whether the definition of “reconstruction” is satisfied.[30]  As discussed in the prior subsection, both buildings meet the definition of repair, but not reconstruction.  Therefore, the elevation requirement does not apply to these buildings and elevation costs are not eligible for funding.

While the Applicant generally references the Uniform Construction Code, which is found at Title 5, Chapter 23 of the New Jersey Administrative Code, the Applicant did not point to a specific provision or section of this code that demonstrates an elevation requirement.  The Applicant’s reference to this code was limited to a reiteration of the code’s definition of reconstruction.[31]  This definition, however, does not apply to the Flood Hazard Area Control Act Rules as these rules already provide a definition for the term “reconstructed.”  Further, while the Uniform Construction Code was amended in 2014 to include an elevation requirement, this provision was not in effect at the time of the disaster.[32]  For these reasons, the Applicant has not demonstrated an applicable elevation requirement. 

Application of the 50 Percent Rule

Pursuant to 44 C.F.R. § 206.226(f)(1), commonly referred to as the 50 Percent Rule, a facility is repairable if disaster damages do not exceed 50 percent of the cost of replacing a facility to its predisaster condition, and it is feasible to the repair the facility so that it can perform the function for which it had been used prior to the disaster.[33]  If a damaged facility is not repairable, approved restoration may include replacement of the facility.[34]  In determining the repair costs, upgrades to non-damaged components are excluded.[35]

The calculation of whether disaster damages meet or exceed 50 percent of the cost of replacing a facility is determined by a fraction, where the numerator of the fraction is the cost of repairing the disaster damage and the denominator is the replacement cost.[36]  Repair costs include only the repairs and any associated codes and standards upgrades that apply to the repair of the damaged elements only.[37]  Replacement costs include all work necessary to replace the facility on the basis of its predisaster design and in accordance with applicable codes and standards.[38]

Accordingly, the issue presented here is whether the numerator should include elevation costs.  As the costs in the numerator are limited to the cost to repair damaged elements and cannot include costs to upgrade elements not damaged in the disaster, it is correct to exclude the costs to elevate the buildings—a cost applying to the entire building—in the numerator.  Indeed, elevation is a cost that applies to an overall change in the entire building, and as such, it does not apply to the repair of flood-damaged elements alone.[39]  Moreover, as discussed in the previous subsections, the code in question was not triggered as neither building meets the definition of “reconstruction.”    

The Applicant argues that it was not until 2015 that FEMA policy clarified that elevation costs do not belong in the numerator, and as such, FEMA should not make a retroactive application of this interpretation.  The 2015 clarification memorandum did not change policy, it simply provided clarification of existing policy and explicitly states as much.[40]  The version of DAP 9524.4 in effect at the time of the disaster clearly states that the calculation of “repair costs” in the numerator for purposes of the 50 Percent Rule should exclude any upgrades to non-damaged elements, even if those upgrades are required by codes and standards.[41]  Accordingly, a whole-building upgrade, such as building elevation, was properly excluded from the repair figure under the guidance in place at the time of the disaster. 

The Applicant contends that without elevating the buildings, it cannot obtain building or occupancy permits, and thus, the buildings will not function as they did immediately before the disaster.  Accordingly, the Applicant argues the 50 Percent Rule effectively allows funding for repairs only when it is feasible to repair a facility so that it can perform the function for which it was being used immediately prior to the disaster.  The 50 Percent Rule, however, speaks only to whether or not a building can be “repaired,” such that it can perform its predisaster function, not whether permits can be obtained after post-disaster repairs.  There is no documentation in the administrative record suggesting that after the completion of repair work the buildings would not be able to perform the functions for which they were being used prior to the disaster.      

Additionally, the Applicant argues that FEMA must follow its past actions taken to resolve a dispute involving the elevation of the University of Iowa’s Arts Building.  However, the resolution of that dispute does not constitute precedent-setting policy and is not controlling over this appeal.  Furthermore, the facts presented in that case are distinguishable.  Here, FEMA correctly applied the 50 Percent Rule and did not obligate the increased funding for replacement.  In contrast, FEMA improperly obligated funding for replacement of the Arts Building based on its incorrect inclusion of elevation costs in the numerator—a mistake that the Office of Inspector General (OIG) identified.[42]  Moreover, the error identified by the OIG with the Arts Building project is precisely the type of error FEMA seeks to avoid. 

Conclusion

The floodplain administrator incorrectly determined the buildings met the definition of substantially damaged; FEMA correctly excluded elevation costs in its application of the 50 Percent Rule; and the Applicant has not demonstrated that applicable codes or standards require elevation.  Accordingly, estimated costs to replace, rather than repair, the buildings are not eligible.  Therefore, the second appeal is denied.