Floodway property value loss could be billions

Market value of property in the floodway to drop 10% to 35%, new study says

According to a study commissioned by the Floodway Coalition of Houston, the restrictions placed on floodway property by City of Houston Ordinance Chapter 19 (as revised in October 2006) will reduce the market value of land and improvements by a total of $1.9 to $3.5 billion. The study, by O'Connor & Associates, estimates that tax revenue will be reduced by $38 to $70 million per year, assuming a net effective tax rate of 2% after exemptions.

Chapter 19 does not allow new construction on land in the floodway, and places restrictions on improved property. If the improvements are substantially damaged for any reason (more than 50% of their value), the owner is not allowed to renovate. Improvements to existing properties may not exceed a cumulative total of 50% of market value over a ten year period.

Meaningful limitations are also placed on properties in the floodplain.

The City of Houston has put in place administrative guidelines which do allow renovations and repairs to properties in the floodplain. The O'Connor & Associates study says of these guidelines: "Based on discussions with legal counsel, we believe the city ordinances and rules and regulations contradict each other. Based on discussions with real estate investors, real estate professionals and homeowners, they are likely to rely upon the ordinance instead of the rules and regulations."

"Our opinion is the value of land in the floodway is reduced by 94% in most cases," the study says. "In atypical cases, an alternative use will mitigate the damages. This will most typically involve an adjacent user who seeks to use the land for parking."

The study says that the impact on the value of improvements is more difficult to determine. When an improvement suffers damage of more than 50% of its value, the improvement would be worth less than zero, given the cost of demolition.

For a property which has not suffered substantial damage, the study gives this example: "...assume a house in the floodway with a total value of $200,000, including $110,000 for land and $90,000 for improvements (not considering the impact of the floodway). The value of the land is reduced to $6,600 ($110,000 - $110,000 x 94%) and the value of the improvements is reduced to $72,000 ($90,000 - $90,000 x 20%, assuming a 20% loss in value), for a total revised value of $78,600."

The study says the changes to Chapter 19, and the impact they will have on improved properties in the floodway and floodplain, have not yet become well known to homebuyers, lenders and real estate professionals. Once they do become known, "many potential purchasers will decline to consider purchasing properties in the City of Houston in a floodway or floodplain....The purchasers willing to risk a substantial casualty to properties in the floodway or floodplain will require a meaningful discount to compensate for the risk."