Craig Schusterick, his workman's hands powdery white with construction grit, led the way across Onyx Avenue on Balboa Island to show off his handiwork.
His nearly complete three-story home — designed with solid wood paneling to echo the Cape Cod feel of its neighbors — features a rooftop deck, an elevator (for the grandkids and for the time in life when climbing stairs becomes more difficult) and the kind of luxe touches that would make any mainland decorator drool.
"It's going to be really nice when it's done," he said with an easy grin.
It seems strange now that just under a year ago Schusterick and his partner, Debbie Coleman, stood in almost the same spot, watching as a bulldozer razed the 580-square-foot 1930s bungalow they'd spent nearly $100,000 fixing up.
Coleman remembered even tearing up a little as a tree they'd nurtured went down.
"We didn't really have a choice if we wanted to have more space — and we needed more space," she said later. "So, consequently, we had to totally knock down the whole thing."
The couple had bought the house planning to add on a couple of bedrooms and a bathroom, while keeping the house's quaint, island-style core intact.
That's not uncommon in a community that has changed remarkably little since it was transformed from a sand bar into a summer vacation hangout early last century, even as Newport's famous mega-mansions sprouted across the Balboa Island Bridge.
Instead, Schusterick and Coleman were among the first homeowners faced with a dilemma that residents say threatens the island's signature old-fashioned charm.
A rule stemming from the city's enrollment in the Federal Emergency Management Agency's National Flood Insurance Program meant that the beach cottages, many originally built as far back as the '20s, were subject to an esoteric calculation of their values that had made it nearly impossible to remodel. Thus, some said, it would be easier to scrap the existing house and start from scratch.
Although the city has recently taken steps to address one major issue — the building department has rejiggered that value calculation — questions remain about the city's place in a federal disaster mitigation system that residents say may not address the community's needs.
"This is a very complex situation," said Councilman Ed Selich, whose district includes Balboa Island. "It's something we need to take seriously and get our arms around."
The problems started with a FEMA audit in February 2011, residents now say.
FEMA conducted the audit to gauge the city's compliance with flood-mitigation rules it agreed to follow by enrolling in NFIP.
In that audit, a FEMA administrator found that one homeowner had "exceeded what was originally permitted" in a remodeling project, and the city issued a stop work order, according to the document.
The improvements, the report says, cost more than 50% of the value of the house. Such projects constitute "substantial improvements," which fall under the category of new construction.
And if homeowners are going to make substantial improvements, their houses must be raised to a level designated by flood maps drawn from FEMA hydrology and topography studies, the guidelines say.
The maps, which first became effective for Orange County in 1989, are updated whenever more information — or funding to get more information — becomes available.
Structures on Balboa Island must be lifted to nine feet above sea level if owners want to make substantial improvements. In the case of nearly all of Balboa's older houses, which are between six and eight feet above sea level, owners would have to embark on expensive and logistically difficult projects to lift them those extra feet.
"Good land-use management would say we should avoid building in high-risk areas," said FEMA floodplain management and insurance branch chief Gregor Blackburn. "Or, if they're going to be built, we all need to work in cooperation in support of each other."
On a larger scale, the idea is to avoid having to rebuild the same disaster-prone neighborhoods over and over again. Flooding, after all, accounts for about 90% of federally declared disasters, a FEMA official said.
And the federal government would ultimately have to foot the bill in the event of one of those disasters, which is why FEMA has a stake in how flood risk is managed.
The audit told the city, "You're implementing your own [flood management] program incorrectly," as Newport's Chief Building Official Seimone Jurjis put it before a packed Balboa Island Fire Station on a misty Saturday morning in March.
The city had not been enforcing limits on new construction and had not been depreciating values of homes. In order to comply, FEMA officials encouraged the city to implement a depreciation schedule.
City staff members did, but the depreciation scale they set for the well-kept cottages, which often sell for $2 million to $3 million with the primo land on which they stand, was steep — even though the improvement limits are based on the value of "bricks and sticks" alone, not an oceanfront lot.
A 5-year-old house would be depreciated by 6%, while a decade-old house would see its value drop by 20%.
And those classic 1930s bungalows, with their breezy bay windows, intricate brick fireplaces and remodeled bathrooms? Those would have seen a depreciation of 70%, as would any house built before 1953.
Start that depreciation from what residents have said was a paltry $160 per square foot, then divide that whole number in half, and you're looking at sums that wouldn't get would-be preservationists like Schusterick and Coleman far.
More than 'bricks and sticks'
For decades, the Balboa Island community had existed in relative harmony with the dark gray blob enveloping the island on maps denoting that the island, along with parts of the Balboa Peninsula, falls within a Special Flood Hazard Area — a flood zone.
But in recent months, the changes the city made following the 2011 audit started to put FEMA and the city's relationship on residents' radar.
"My take is that FEMA went to the city [and said], 'If you want us to endorse your flood insurance, then you need to conform to our guidelines.' What the city did was they conformed to FEMA's guidelines," said resident Terry Jansen. "That's what really caused the red flag."
Jansen, a Balboa Island Improvement Assn. board member who has helped spearhead efforts to raise the community's awareness about the issue, said he was chatting with longtime island Realtor Laura Gale about a year ago when she mentioned the remodeling hurdles.
Don Abrams, another island real estate agent who estimated he's sold about half of the 1,200 homes on Balboa Island at some point since 1998, added that he had at least one house fall out of escrow because a prospective buyer had wanted to remodel.
"I sell lots of homes that are preservable," which people plan to add to or remodel, he said. "I own two older homes myself, and I strongly believe in preservation. The older homes have a lot to do with the character of the island."
So, Jansen said, he asked residents to get involved.
"We ended up with a great, diverse committee, and we started researching this whole thing, what it meant to property owners on the island."
Many said they found their limitations after they started exploring long-planned projects.
"We always thought we'd add an apartment over the garage for a caregiver," resident Suzanne Pitts, 61, said back in March, before the city toned down that steep drop in value.
Her husband, John Pitts, 62, said they were told they'd be able to do about $28,000 in work, but what they wanted to do would have cost $45,000, "on the low side."
If they'd known they could be subjected to such regulations, they might not have bought the house several years ago because they didn't want to move again, John Pitts said. And it would have been too expensive to level their 1937 cottage and start from scratch.
"What they've done," he said, "is reduced the marketability. It's condemnation without representation."
Since they brought their concerns to the city earlier this year, residents, including the Pitts, say staff members and Selich have been responsive.
And in late March, the city developed a new depreciation table — one that accounts for the condition of the house and caps depreciation at 20% for most. Furthermore, the values started at $300 per square foot.
John Pitts said for his and Suzanne's purposes, that "softens the blow tremendously," and he expected to be able to complete the work.
Still, some questioned the change in what they called an arbitrary policy.
"If someone made me take my house down, and I found out that not even three months later, guess what, we changed our mind … I mean there's nothing wrong with a new house, a big house, but that should be our choice," Gale said.
Jurjis said that an earlier building permitting administration hadn't laid out why exactly the depreciation scale was so severe, or why the skimpy $160 per square foot starting point was chosen. It didn't require action because it fell under the purview of the existing ordinance, he said.
FEMA officials said they didn't dictate a particular rate of depreciation — only that in order to comply with the city's NFIP enrollment rules, it should have one.
"The FEMA position is, 'We're not going to tell the community how to [determine market value],'" he said. "We do tell a community to do it based on what makes sense to you and your region."
The new one, Jurjis told residents and the council at a study session in April, was based on standard construction cost averages and a depreciation formula buried in a FEMA document online.
But the new scale may still not be enough, said Lyle Dawn, 65, who owns a vacation house on Balboa. He and his wife, Cynthia McGranahan, 59, plan to move into the 1930s Yale-style cottage on one of the island's most-coveted blocks full time within the next couple years.
Since they bought the place about 17 years ago, the couple have refinished the floors, added closet space and knocked down an "obnoxious 1970s fireplace" before hiring an expert mason to reconstruct a period-appropriate one.
When they moved in, they'd hoped to add more living space, and under the new depreciation scale, Dawn said, it might've been doable.
Recently, though, McGranahan was diagnosed with multiple sclerosis. The couple wanted to remodel their small bathroom to allow space for a wheelchair, in addition to adding an elevator for a second-story bedroom.
None of this is inexpensive, Dawn said, and it feels like punishment for putting love and care into an old house.
"I just think that the island should be saved for the charm," he said. "If people want bigger and better, that's fine, let them build these big monster houses. But if someone wants to add to these nice cottages ... I didn't just pay dirt value for it, I bought a house."
Newport and the NFIP
Floods, though, don't distinguish between historic seaside homes and McMansions — when they come, they drown shiny hardwood floors and shag carpet alike.
The NFIP, administered by FEMA, offers federally backed flood insurance for homes in flood zones, so long as the city or community where they're located is enrolled in the program.
Cities can participate in the NFIP if they pass a flood plain management ordinance, as Newport Beach did in 1993. In doing so, they agree to enforce FEMA flood mitigation rules — like the substantial improvement caps — in exchange for access to federal money.
"What it does is say, 'Communities, if you're going to join the NFIP, we will make a map showing your risk. Then in return, you need to adopt and enforce [a flood plain ordinance] at a local level,"' Blackburn said.
Without a federal program, officials say, it would be nearly impossible for homeowners to get affordable flood insurance in the private sector. And without flood insurance in a flood zone, most lenders can't give homeowners mortgages.
"Lenders that buy property and sell property have federal oversight," Blackburn said. "They have auditors to enforce federal regulations."
Those regulations require that lenders review for risks, one of which is flood hazard. Then, if a structure is at risk of flooding, lenders must require a borrower to carry flood insurance before issuing an FDIC-backed loan.
According to FEMA officials, as of Jan. 31, Newport Beach homeowners carried 1,609 NFIP policies covering $470,755,600 worth of buildings and their contents.
Although Newport isn't bound to enforce flood mitigation measures by law, per se, every five years or so, FEMA audits communities enrolled in the NFIP to ensure that they're complying with flood mitigation measures. If the city falls out of compliance with those rules, its status in the NFIP could be jeopardized, in turn jeopardizing the funding and benefits that come from the city's enrollment in the program, officials say.
Nevertheless, Newport residents wonder whether their risk is being unfairly lumped in with the rest of the country's, since all NFIP insurance is part of the same pool.
Balboa Island is no New Orleans, and it's not on the Eastern Seaboard, regardless of what the Cape Cod cottages evoke.
Furthermore, residents say, private insurers may be able to provide a lower-cost alternative to the NFIP's premiums, which, in spite of discounts afforded to Newport residents because of its high standing in an NFIP community rating system, run thousands per year. And with recent federal legislation, they're climbing even higher for many residents.
At the April study session, Selich called on city staff to look into possible salves, among them: commissioning independent studies of the harbor's flood risk (which could cost up to $200,000 and months of time) exploring whether the city's long-anticipated (and also pricey) Balboa sea wall rebuilding project would lower flood risk, and withdrawing from the federal program altogether.
So what would happen if Newport dropped out of the NFIP?
"There are very real and financial consequences," Blackburn said.
It would put Newport at risk of losing federal funding, and if there ever were a major flood, the city wouldn't be eligible for aid unless the disaster was federally declared as such.
Plus, for lenders, FEMA's map, not to mention that gray blob covering Balboa, stays firmly in place.
It's very unusual for communities to voluntarily withdraw from the program. It may have happened, but officials couldn't think of specific examples.
And is cheaper insurance from a private company too good to be true?
Possibly — at least, if the city wants to ensure that every homeowner in a flood zone is able to get insurance.
"Philosophically, oftentimes, people say the government should be the cheapest," explained Rebecca Byrom, who owns a San Diego-based insurance agency that provides flood insurance to about 50 island clients. "But if you think about insurance and how it works, it's all about risk. ... If you insure the whole nation, that's a lot of risk, as opposed to if you're an insurer who chooses just to insure in California."
That's how private insurance carriers, such as American Modern, which she sells, can undercut NFIP rates. Byrom said that ultimately, "The federal government wants to privatize federal flood insurance so they can get out of the business," adding that "there's been rumblings within the industry that other major carriers are going to try to jump into the marketplace."
"A marketplace in states like California, it's pretty safe," she said.
But there's a wrench in that process, because, as she put it, "I don't think you're going to find anybody who's going to jump into New Orleans or the Jersey Shore."
FEMA officials, however, are adamant that it would be hubristic to discount the West Coast's flood risk.
"I can tell you this: There is a risk of flood in California," Blackburn said.
The Sacramento area has one of the highest flood risks in the country, and Malibu has seen a fair amount of repetitive loss, officials said.
Huntington Beach, too, has seen flooding.
Still, when the sun's out, few places in the world seem less prone to disaster than Balboa Island.
Cars roll leisurely down narrow one-way streets lined with single-story beach cottages, while residents sprinkle potted plants on front porches.
Along Marine Avenue, Balboa's main drag, you'll find that there's always money in banana stands — island mainstays that harken back to mid-century strolls on the boardwalk.
And from Craig Schusterick's third story roof deck in the heart of the island, you can see the harbor, its boats floating on placid waters.
OLD DEPRECIATION SCHEDULE (Starting from $160 per square foot) Source: City of Newport Beach
Age (years) Percentage Depreciation 1 1% 2 2% 3 3% 4 4% 5 6% 10 20% 15 25% 20 30% 25 35% 30 40% 35 45% 40 50% 45 55% 50 60% 55 65% 60+ 70%
NEW DEPRECIATION SCHEDULE (Starting from $300 per square foot)
For homes in "good condition," meaning they are well-maintained without "overt signs of wair and no obvious maintenance needed." Structures that are in "average condition" are depreciated by a higher percentage, topping out at 30%.
Age in years Percentage Depreciation 0 to 5 3% 5 to 10 7% 10 to 15 11% 15 to 20 14% 20 to 25 17% 25+ 20%
For more information, go to the City of Newport Beach's Floodplain Management page here.