Cost-Effectiveness of Property Acquisition for Flood Mitigation

Main Findings

• Property acquisitions are a cost-effective strategy for mitigating floods with an average return of nearly 200%
• 64.1% of property acquisitions had a ROI greater than 1.
• Return on investment (ROI) of property acquisitions increases through time. All projects evaluated in this analysis were cost-effective (ROI > 1) after 15 years.
• Property acquisitions in riverine systems were slightly more cost-effective (217% return on investment) than in coastal systems (161% return on investment), but the difference is unlikely to be statistically significant.
• Property acquisitions appear to be slightly more cost-effective than building elevations - another flood mitigation approach. Building elevation has an average return of 171% (but the difference is unlikely to be statistically signficant)

Goals of this Analysis

This analysis attempts to answer: Are property acquisitions a cost-effective flood mitigation strategy? Property acquisitions are also known as voluntary buyouts and are a component of managed retreat from flood prone areas.

Methodology

This analysis uses data from Loss Avoidance Studies. Loss Avoidance Studies compare the costs of mitigation actions with the losses avoided from actual flood events. Unlike a benefit-cost analysis (BCA), a loss avoidance study is retrospective and looks back at actual floods, rather than forecasted events.

Most of the studies were found on FEMA’s website of Hazard Mitigation Assistance Loss Avoidance Study Summaries. In most cases the full study (not just the summary report) was used. Additional Loss Avoidance Studies by entities other than FEMA (e.g., consulting firms, state emergency management agency) were found by searching Google for a combination of the following terms: “loss avoidance study”, “acquisition”, “buyout”, “flood”, “mitigation”.

The following data were extracted from each study:

• Location
• Type of system (riverine, coastal)
• Number of structures
  
• Project Investment (USD) (including costs of acquisition, demolition, legal fees, etc.)
  
• Losses avoided (USD) (including damages to structure & contents and displacement costs)
• Years of acquisition (start & end dates)
• Years of analysis (i.e., period over which flood events were examined)
• Number of flood events considered

Studies were excluded if they did not distinguish acquisition from other mitigation approaches in their analysis.

A total of 13 separate loss avoidance studies examining property acquisition were included in this analysis. Many of the studies contained information on multiple localities (e.g., counties, cities). The 13 studies contained a total of 39 data points on acquisitions. A data point typically corresponds to several property acquisitions in a county, town, or city. In some studies, the loss avoidance study aggregated several counties. In all cases each data point represents several acquired properties.

Return on Investment (ROI)

Return on Investment is calculated as: \[ Losses Avoided (USD) / Project Investment (USD) \]

As stated above, Losses Avoided include damages to structure & contents and displacement costs. Project Investment includes costs of acquisition, demolition, legal fees, etc.

An ROI greater than 1.0 indicates that the benefits (i.e., losses avoided) outweigh the costs (i.e., project investment) and the mitigation activity is considered cost-effective.

The average ROI for property acquisitions is 2 (min=0, max=6, 95% confidence interval= +/-0.57). The figure below shows the frequency distribution (i.e., histogram) of ROI for acquisitions. The red dashed line indicates the average ROI.

64.1% of property acquisitions had a ROI greater than 1.

Another way to visualize the ROI is to compare the project investment to losses avoided. The dashed line indicates an ROI of 1. Any points above that line have a ROI > 1 and are considered cost-effective.

Riverine vs. Coastal Flooding

Property acquisitions in riverine systems were slightly more cost-effective (217% return on investment) than in coastal systems (161% return on investment), but the difference is unlikely to be statistically significant due to the high variation in ROI for both groups.

Note: The upper and lower “hinge” correspond to the 25th and 75th percentiles. Data beyond the “whisker” are considered outliers.

ROI Through Time

This figure examines how ROI of property acquisitions changes through time. The x-axis is the number of years over which the loss avoidance study was conducted. The blue line is a best-fit linear regression with 95% confidence intervals in grey.

Return on investment (ROI) of property acquisitions increases through time. All projects evaluated in this analysis were cost-effective (ROI > 1) after 15 years. It makes sense that ROI would increase with time as more flood events can occur (and losses are avoided).

Property Acquisition vs. Structure Elevation

Property acquisition is not the only flood mitigation strategy. Another common approach is structure elevation.

An additional 10 loss avoidance studies on elevations were acquired by similar methods as described above. These studies contained 39 data points.

The average ROI for eleveation is 1.71 (min=0.73, max=3.31, 95% confidence interval= +/-0.58). The average ROI for property acquisitions is 2.

Based on this preliminary analysis, there does not appear to be a statistically significant difference in ROI between acquisition and elevation.

Note: The upper and lower “hinge” correspond to the 25th and 75th percentiles. Data beyond the “whisker” are considered outliers.

Caveats

There are numerous costs and benefits of property acquisition that are not considered in a loss avoidance study (e.g., savings on flood insurance premiums for property owners, loss of proprety tax revenue for municipalities, change in property value for remaining structures, etc.). These must be considered if a comprehensive assessment of cost-effectiveness is going to be made.

Two of the studies (FEMA 2009 Eastern Missouri; FEMA 2013 Austin, MN) include vacant lots in the analysis. Because there were no structures on acquired vacant lots, there are also no avoided losses. However, the cost of acquiring the vacant lots was included in the ROI calculation because it was a part of the overall project cost.

Studies Included in this Analysis

The following Loss Avoidance Studies that reported on property acquisition were used in this analysis:

The following Loss Avoidance Studies that reported on structure elevation were used in this analysis: