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On November 23, 2018, the United States government released Volume II of its Fourth National Climate Assessment.1  The report assesses the effects of the expected rise in sea levels resulting from global climate change, concluding that under one reasonably foreseeable scenario, it is likely that between $66 billion and $106 billion of real estate in the United States will be below sea level by 2050, with inundation from rising seas quadrupling that range of damage by 2100.  Impacts of this magnitude make it likely that flood insurance will be significantly more costly – or not available at all in some areas – adversely affecting a property’s marketability and mortgageability even before a flooding calamity occurs.  When one considers that a 30-year mortgage issued in 2019 is scheduled for pay off in 2049, it is clear that the time has arrived to consider the effects of climate change when undertaking real estate due diligence. 

In addition to identifying the potential for rising sea levels, the Fourth National Climate Assessment concludes that climate change may cause real estate assets to suffer damage from storm surge flooding, increases in the severity of storms, wildfires, saltwater intrusion into coastal aquifers, and elevated groundwater tables.  Further damage will occur from the flooding of hazardous waste sites, erosion, and forest fires sparked under drought conditions.  Hotter temperatures are also expected to make many areas of the United States far less habitable, adversely affecting real estate values.  As explained below, each of these issues is an appropriate subject of real estate due diligence.

Moving Beyond the Traditional All Appropriate Inquiry

The All Appropriate Inquiries (“AAI”) standard promulgated by the U.S. Environmental Protection Agency2  has always been the beginning – rather than the end – of real estate due diligence, because the Phase I report that AAI requires does not address such potentially relevant issues as the presence of lead paint and asbestos-containing materials, contaminated drinking water, the presence of PCBs in underground or in-wall electric cables, radon, mold, poor indoor air quality, wetlands, whether facility has the required permits to operate, or whether the facility is operating in compliance with environmental regulations and permit requirements.  The AAI and most of these other issues look backward at potential legacy liabilities and the potential burden they would place on the future property owner.  By contrast, the issue of climate change requires forward thinking to consider how the expected changes in future climate and related environmental conditions may affect the real estate asset.     

Understanding the Meaning and Limitations of the FEMA Maps

A key aspect of real estate due diligence is scrutiny of the flood maps published by the Federal Emergency Management Agency (“FEMA”), but there is widespread confusion as to what these maps mean and how they are prepared.  The maps identify areas within the 100-year and 500-year floodplains.  FEMA describes the area outside the 500-year floodplain as “areas of minimal flood hazard.”3  While that may have been correct in the past, it is no longer so.

The first step in using the FEMA maps is to understand the nomenclature.  The so-called 100-year floodplain is the area that has a 1% annual chance of flooding.  Over the course of a 30 year mortgage, there is a 26% likelihood of one or more floods in the 100-year flood plain.4  The 500-year floodplain is the area that has a 0.2% annual chance of flooding.  Over the course of a 30 year mortgage, there is a 6% likelihood of one or more floods in the 500-year floodplain.These risks are substantial.

But the situation is more serious than one would infer from the FEMA maps.  The maps themselves are predictions based on hydrologic models that utilize the limited available historical data.  They are frequently wrong.  For example, a neighborhood of Houston called Memorial City not within the FEMA-designated 500-year flood plain has experienced serious flooding three times in the last 10 years.6  Errors in FEMA maps are hardly surprising, because predicting flooding requires analysis of the complex interaction of tides, storm surges, precipitation, the built environment, and other factors.

Federal law authorizes FEMA to take climate change and the resulting rise in sea levels and more serious storms into account in preparing flood plain maps,7 but FEMA has failed to do so.8  Since climate change is expected to cause sea levels to rise by up to 8 feet (or even 11.5 feet in some areas) by 2100,9 this deficiency is material.

If real estate is found to be in an area where flooding may be a significant risk, procuring flood insurance is a prudent expense, but it is no panacea.  Most flood insurance available in the United States is made available under the National Flood Insurance Program operated by the federal government.  Coverage limits for commercial properties are very low: $500,000 for damage to real property and $500,000 for damage to personal property.  The program does not offer business interruption coverage.  Additional property damage coverage and business interruption coverage are available from excess carriers, but the cost of premiums is likely to rise over time as insurance companies consider the additional flooding risks from rising seas and more intense storms.  As a taste of what is to come, in 2017, Hurricane Harvey dumped 50 inches of rain on areas of Houston over a four-day period, causing massive flooding and $125 billion of damage to property.   

Moreover, the National Flood Insurance Program is not being run on an actuarially sound basis.  From 2005 to 2018, the program paid out $36 billion more than it charged in premiums, resulting in massive borrowing from the U.S. Treasury that the program has no hope of repaying.10  In effect, the program is providing an enormous subsidy to property owners with real estate in areas susceptible to flood hazards.  As recommended by a report issued by the U.S. Government Accountability Office,11 it is foreseeable that at some point Congress will step in and require that flood insurance premiums be set at a level that is actuarially sound.  This will cause premiums to skyrocket, resulting in an economic hit to real estate owners regardless of whether their properties experience flooding.  Significant annual premium increases are occurring and are expected to continue to occur even under the law currently on the books.12 Adding to the uncertainty, the National Flood Insurance Program has been operating on the basis of short-term reauthorization extensions; it will expire at 11:59 pm on December 21, 2018 unless reauthorized by Congress.13

In considering the effect of future flooding on a real estate asset, consideration should also be given to critical infrastructure that the asset relies on for potable water, the disposal of sanitary waste, and transportation. 

Greenhouse Gas Regulations

Due diligence for climate change should also consider how a real estate asset will fare under current and future regulatory programs to reduce greenhouse gas emissions.  The exact contours of these regulatory programs cannot be predicted with assurance, but what can be anticipated is that the price of electricity and fossil fuels is likely to increase substantially.  Efforts may also be made to “shame” the owners of an inefficient building by requiring the posting of an “energy efficiency grade” by the front entrance, as will be required in New York City under Local Law 33 of 2018, enacted earlier this year.

In 2017, New York City Mayor De Blasio proposed a local law that would require costly energy retrofits of existing buildings whose energy efficiency falls short of the code requirements applicable to newly constructed buildings in the City.14  As an indication of the costs the bill would impose, it has been opposed vigorously by trade associations representing the real estate industry.15  The New York City Council is now considering a bill that would impose increasingly stringent limits on carbon emissions from non-rent regulated buildings with more than 25,000 square feet of floor area, with the goal of reducing those emissions by 80% by 2050.16  Due diligence for a major real estate transaction should consider the energy efficiency of the real estate asset and the capital improvements that may be required under current and future laws.  

New Building Code Provisions

Where coastal property is purchased for the purpose of development, care must be taken to determine whether building code requirements designed to address special flooding risks have been adopted (or are under consideration) in the relevant jurisdiction.  Such requirements – which can significantly increase the costs of development – have been adopted by several coastal municipalities.  For example, in New York City, the Department of Buildings requires new construction to take into account flooding at heights and in areas well beyond those identified in the effective FEMA maps.

Too Hot to Handle?

Finally, consideration should be given to whether the real estate asset is located in an area that might be rendered effectively uninhabitable by rising temperatures.  In 40 years, Phoenix is expected to experience conditions above 100 degrees Fahrenheit four months a year, and more than five months a year by 2100.17  By 2100, Phoenix may experience more than 100 days a year of temperatures above 110 degrees,18 and temperatures in Dallas are projected to be above 95 degrees for more than four months a year.18  Real estate values can be expected to decline in such areas as populations and businesses move elsewhere.

Conclusion

Climate change is upon us, and its impact on real estate will be substantial.  Prudence dictates climate-related due diligence when acquiring or financing real estate.


1. The report was prepared under the leadership of the National Oceanic and Atmospheric Administration by a team of 300 federal and non-federal experts, pursuant to the Global Change Research Act of 1990.  Prior to its release, the report was reviewed by 13 federal agencies and a committee of the National Academies of Sciences, Engineering, and Medicine.

2. 40 C.F.R. Part 312.

3. https://www.fema.gov/flood-zones

4. 1.00 – 0.9930 = 0.26.

5. 1.00 – 0.99830 = 0.06.

6. https://www.vox.com/science-and-health/2017/8/28/16211392/100-500-year-flood-meaning

7. 42 U.S.C. § 4101b(b)(3)(D).

8. https://www.fema.gov/coastal-frequently-asked-questions#How%20is%20FEMA%20accounting%20for%20sea%20level%20rise%20and%20climate%20change%20on%20the%20FIRMs?%20Does%20sea%20level%20rise/climate%20change%20affect%20the%20FIRMs?

9. 2018 National Climate Assessment, Chapter 8 (https://nca2018.globalchange.gov/chapter/8/).

10. https://www.insurancejournal.com/blogs/right-street/2018/09/13/500996.htm.

11. U.S. Government Accountability Office, Flood Insurance: Comprehensive Reform Could Improve Solvency and Enhance Resilience (April 2017) (https://www.gao.gov/assets/690/684354.pdf).

12. 42 U.S.C. § 4015.

13. https://www.fema.gov/national-flood-insurance-program/national-flood-insurance-program-reauthorization-guidance

14. See “De Blasio Vows to Cut Emissions in New York’s Larger Buildings,” New York Times (Sept. 14, 2017).

15. https://www.politico.com/states/new-york/city-hall/story/2018/04/25/de-blasios-energy-efficiency-mandates-languish-with-no-deal-in-sight-382038

16. NYC Council Int. 1253-2018 (https://legistar.council.nyc.gov/Legislation.aspx).

17. https://www.nytimes.com/interactive/2016/08/20/sunday-review/climate-change-hot-future.html?mcubz=0.

18. http://www.climatecentral.org/news/87-cities-4-scenarios-1-really-hot-future-for-us-17866.

19. https://www.nytimes.com/interactive/2016/08/20/sunday-review/climate-change-hot-future.html?mcubz=0.