Making Decisions

Problem Set 4
Methods of Planning Analysis II
Professor Mi Shih
April 30, 2018

Yoga Adhi Pratama

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I. Introduction

Highlands, one of the municipalities in Monmouth County, New Jersey, was hit by Hurricane
Sandy in 2012. The coastal communities located in the eastern part of the town was severely affected
by Sandy. The Borough of Highlands plans to take several recovery actions of some 1,200 housing
units and 35 commercial properties that were heavily damaged by the storm. These several actions
include some are being repaired, some are being elevated, some are being bought by the State and then
demolished, and others have been abandoned. The homeowners and business property owners will
decide to take one of these actions. However, their decisions are made based on several considerations,
such as the annual income of property owners, the availability of state funds for buyouts, the availability
and the costs of flood insurance, the condition and fluctuation of the local real estate market, and the
flooding risks in the future.
From the municipal point of view, one of the main challenges faced by the Borough of
Highlands regarding these actions is the property taxes in the area that will significantly increase under
some of the alternative recovery scenarios. This condition will burden the property owners affected by
Sandy. In order to examine the impacts of alternative recovery scenarios, a fiscal impact analysis will
be developed from the municipal perspective, while a financial analysis focusing on a typical home
located in the floodplain will be conducted based on homeowners perspective. Both analysis will be
employed to find best solutions that benefit for both municipal and homeowners.

II. Fiscal Impact Analysis (The Municipality)

In order to analyze the impact of some different actions taken by property owners for their
damaged homes and business properties, a fiscal impact analysis was employed based on several data,
such as property value, property tax rate, population, residential and commercial properties, demolition
costs, school district budget, and pupil enrollment. Before Hurricane Sandy hit the municipality, the
total citywide assessed property value for residential was $538,353,100, while for commercial property
was $60,490,500. The median residential property assessment value was $219,000, and the median
assessed value for commercial property was $580,000. Several types of property tax rate were included
in the 2012 Highlands’ general tax rate of 2.545%, namely county tax (0.329), district school tax
(1.185), and municipal purpose tax (1.031). Population data are also included in the fiscal impact
analysis. According to the 2010 U.S. Census, the municipality has 5,005 residents. Approximately,
there are 900 workers in the municipality. Regarding residential and commercial properties, the
municipality has 3,146 housing units, of which 2,623 were occupied prior to Hurricane Sandy, 1,537
housing units were occupied by the homeowners, and 1,086 were occupied by renters. Majority of the
503 vacant housing units were seasonal rentals. In total, there are 2,263 residential parcels and 104
commercial parcels in the municipality. There is also demolition costs need to be considered in the
analysis. If a property owner abandons their property, the municipality needs to pay $2,500 for the
demolition. In the analysis, an assumption of sticky expenditures is made where the expenditures for
some public servants only shrink by 50% of the amount that the demand for these public services
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shrinks. Regarding the school district, the district school budget for 2012 is $7,181,546, and the
estimated average daily enrollment is 610 pupils.
The recovery actions for Highlands are based on five different alternative recovery scenarios.
In the first scenario, 1,200 housing units and 35 commercial properties are repaired, but the property
structures are not elevated so that their ratable value does not change. In the second scenario, the
structures of those housing units and business properties are elevated. Therefore, their assessed property
value increase by 40%. In the third scenario, the property owners sell their home and business properties
at 60% of the property assessed value. This will result in a 40% loss of ratable value. Under this
scenario, there is also an assumption that these properties are reinhabited at 50% of the earlier
occupancy in the short term. In the fourth scenario, the housing units and business properties are not
rebuilt where the municipal demolish them, resulting in the decrease of their property assessed value
by 100%. In the last scenario, the homeowners and the property owners decide to do only minimal
repairs to their properties without abandoning them. Therefore, their property assessed value will drop
to 60% of their assessed value prior to Sandy.
A fiscal impact analysis was conducted by calculating the change in residential, commercial,
and total assessed property values in the first step. For each scenario, the change in assessed property
value was calculated by multiplying the percent of value change with the number of properties and the
median property assessed value. The percent of value change is different for each scenario as mentioned
in the previous paragraph. The total change in assessed property values was calculated by summing up
the change in assessed property value in scenario 1, 2, 3, 4, and 5.
Next, the population and employment changes associated with the scenarios were determined
in the analysis. To calculate the change in total population, first, the number of units lost by bedroom
class was utilized by using 2011 ACS data on the percentage of units in each bedroom class (0-1
bedroom, two bedrooms, three bedrooms, and 4-5 bedrooms). Then, the number of housing unit lost
was calculated by multiplying percent change of resident with the percentage of housing units in
bedroom class. However, the percent change only applies to the third scenario (-50%) and the fourth
scenario (-100%). After that, the number of housing units lost was separated into owner-occupied and
renter-occupied units, utilizing the total percentage of owner-occupied and renter-occupied housing
units in the municipality. The change in residents and school-age children in typical units were
calculated by multiplying the number of units lost by tenure with total persons per unit by tenure for
each bedroom class based on the Quick Guide to New Jersey Residential Multipliers by David Listokin.
The total change in residents and school-age children are the total of two components: the change in
residents and school-age children from owner units for all bedroom types and the change in residents
and school-age children from renter units for all bedroom types. The total change in the number of
workers in Highlands was calculated by multiplying the change in the number of commercial units with
the jobs per unit of which we assume that each commercial unit generates 2.5 jobs.
In the next step, the allocations or shares of municipal expenditures and general revenues for
the residential and non-residential uses were calculated by averaging the residential percentage of total
assessed value and the residential percentage of total parcels. After that, the change in municipal
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expenditures from 2011 was calculated by dividing the 2011 expenditures into two categories:
residential and non-residential expenditures, utilizing the residential share from previous steps. Then,
the total per-capita and per-worker municipal expenditures were calculated. The change in residential,
non-residential, and total municipal expenditures were calculated by using the change in total
population and workers, accounting for the sticky expenditures. The total change in expenditure is the
total of total change in residential costs, total change in non-residential costs, and total demolition costs.
By using the similar step provided to find the change in municipal expenditures, the change in
municipal revenues was calculated by dividing the 2011 general revenue into two categories: residential
and non-residential revenues, utilizing the residential share in the previous step. The change in total
revenues is the total of total change in residential revenues, total change in non-residential revenues,
and the change in property tax revenues.
Finally, the net fiscal impact of the alternative recovery scenarios on the municipal budget was
calculated by subtracting change in total expenditures from change in total revenues. The impact on the
school district budget was also calculated by subtracting the change in student costs from the change
in school district tax revenues.
The results of net fiscal impact on the municipal budget and school district budget for each
alternative recovery scenario were presented in Table 1. Scenario 1 where 1,200 housing units and 35
business properties are repaired does not have an impact on the change of net fiscal impact. This
situation happens because the ratable property value does not change since the property structures are
not elevated. Thus, the absolute value of net fiscal impact prior the Hurricane Sandy (2011) and post-
Sandy have the same value.
In scenario 2, there is no change in expenditures while total revenues will increase by
$1,167,504. The increasing amount of change in total revenues is due to impact of the assessed property
value that increased by 40% as the housing units and commercial properties are elevated. This scenario
will affect the change in property tax revenues that will increase by 18.9%. Since there is no change in
residential costs and non-residential costs, while the demolition costs are not applied in this scenario,
the change in total expenditures were not affected ($0).
In scenario 3 and 4, the net fiscal impact on the municipal budget was negative because the
change in total expenditures is higher than the change in total revenues. The fewer (negative) amount
of revenues is due to population change where the properties are reinhabited at 50% of their earlier
occupancy in scenario 3 (based on assumption) while abandoning properties will result in population
loss by 100% in scenario 4. As a result, these two scenarios have lost revenues from property taxes.
However, the negative impact on the municipal budget is much higher in scenario 4 than in scenario 3
because of at least two reasons. First, there is still assessed value of 60% in scenario 3 while scenario
4 has no assessed value because of property demolishing. Thus, the decrease in property tax revenues
that effect in change in total revenues is much higher in scenario 4 than in scenario 3. Second,
demolition costs are applied in scenario 4, resulting in more expenditures compared to in scenario 3.
Although the population change resulted in lower (negative) number of change in residential costs and

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non-residential costs, the demolition costs gave the most significant impact on expenditures categories
in scenario 4.
In scenario 5, as the assessed residential and commercial property value drops to be only 60%
of the assessed property value prior to the storm, it gives the impact on the decrease in total revenues
by $1,167,504. Since there is no change in population and workers, the change in total expenditures is
$0 in this scenario.
For the net impact on school district budget, residential assessed value change affects the
amount of change in school revenues while the change in students (school-age children) affects the
amount of change in school expenditures. Based on these two factors, scenario 4 has the most negative
net fiscal impact on school district budget. This happens because the change in school revenues is high
where the school has lost revenues from the decrease of residential assessed value, while at the same
time, no change in expenditures can be seen because there is no change in enrolled students. Although
significant changes occur in scenario 3 and 4 due to residential assessed value change and school-age
children change, both scenarios have negative value in the change in school revenues and school
expenditures. This resulted in positive net fiscal impact in scenario 3, as the negative value of change
in school expenditures is higher than the revenues. In addition, a lower negative net fiscal impact value
can be found in scenario 4 compared to scenario 5.

Table 1. Net Fiscal Impact on Municipal Budget and School District Budget for Each Recovery
Scenario in Highlands, New Jersey

Net Fiscal Impact Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5

Net Fiscal Impact on Municipal Budget (Change)
Change in Total Revenues $0 $1,167,504 -$1,837,401 -$4,258,553 -$1,167,504
Change in Expenditures $0 $0 -$1,109,262 $868,976 $0
Net Fiscal Impact on
Municipal Budget $0 $1,167,504 -$728,139 -$5,127,529 -$1,167,504
Net Fiscal Impact on Municipal Budget (Absolute)
New Total Revenues $8,602,807 $9,770,312 $6,765,407 $4,344,254 $7,435,303
New Total Expenditures $8,099,675 $8,099,675 $6,990,413 $8,968,651 $8,099,675
Net Fiscal Impact on
Municipal Budget $503,132 $1,670,637 -$225,006 -$4,624,397 -$664,372
Net Fiscal Impact on School District
Change in School Revenues $0 $1,245,672 -$1,245,672 -$3,114,180 -$1,245,672
Change in School Expenditures $0 $0 -$1,405,850 -$2,811,700 $0
Net Fiscal Impact on School
District $0 $1,245,672 $160,178 -$302,480 -$1,245,672

After analyzing the net fiscal impact based on Table 1, it is apparent that the most favorable
outcome for the municipality can be found under scenario 2. In scenario 2 where 1,200 housing units
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and 35 business properties elevate their property structures, the fiscal impact analysis resulted in the
highest positive amount of net fiscal impact both on municipal and school district budget.
The fiscal impact and school district analysis in this study use per-capita approach assuming
that the alternative scenarios would represent an additional incremental demand for services within the
current capacity of local infrastructure. In addition, the recovery scenarios will generate a more realistic
outcome if social and demographic characteristics and emergency services related to the natural disaster
are taken into account in the fiscal impact analysis. The indirect impacts were not considered in this
analysis due to the difficulties in predicting multiplier effects. Therefore, the decision among alternative
recovery scenarios should not be solely based on this fiscal impact analysis. The nature of development
also affects the fiscal outcome. Since the area is prone to Hurricane Sandy, the environmental impact
also need to be considered. Thus, such land use adjustment could be put in place to encourage the
preferred outcome and assure fiscal resilience in a long-term. Better tax policy should also be
implemented to maximize the outcome. Other plans or policies to consider are applying a flood
insurance program and a revolving loan fund to help the property owners elevate their structures, as
well as enforcement of elevation requirements for the severely impacted area.

III. Financial Analysis (The Homeowner)

In order to analyze the financial implications of some different recovery actions by the
homeowners, a financial analysis from homeowners’ perspectives was conducted based on cash flow,
net present value (NPV), and percentage of income spent on housing costs. Several data were gathered
as the inputs for analysis, including annual household income, property value, property tax rate,
equalization ratio, primary mortgage, property improvements, buy-out price, flood insurance, and
discount rate.
The financial analysis was developed with an assumption where the financial situation of the
homeowner is exactly at the median for Highlands, which is an annual median household income of
$78,860. This income grows at a rate of 2% per year. The homeowners initially allocate 30% of their
annual household income to cover housing expenses. However, the homeowners could spend a larger
share of annual household income towards housing costs for some scenarios.
Property value in Highlands is also estimated at the median for this municipality ($219,000).
The nominal annual assessed value growth rate is 3%. Property tax rate used in the analysis is based on
Highlands’ 2012 general tax rate, which is 2.545% of assessed value. However, assessed value is only
94.34% of the true value of real property in the municipality, meaning that there is s slight difference
between the assessed value and the actual or true real estate sales. For example, a house in Highlands
with a true value of $500,000 will be assessed at $471,700. This equalization ratio of 94.34% is used
to calculate real estate taxes, particularly by multiplying the true property value by the equalization
ratio to find the assessed property value, then multiply by the general tax rate.
Furthermore, the sale price of the property in 2004 is $150,000, where the homeowner
purchased with a 20% down payment, or in other words, with an original mortgage principal at 80% of

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the 2004 sale price. The 30-year mortgage interest rate is 7%, and the annual payment is $9,670. At the
time of Sandy, the mortgage has $102,450 in remaining principal.
There are some costs associated with property improvements where the homeowners may
choose to repair their property, either by refurbishing the home that will cost $35,700 or by refurbishing
and elevating it that will cost $59,500 to its original condition. The appraised value of the property,
however, will increase by 40% if the homeowners choose to elevate their house. Repairing the house
will burden the financial capability of the homeowners so that they need to take out a secondary
mortgage to cover the property improvements costs. This secondary mortgage has a 15-year term with
a fixed interest rate of 4%.
Furthermore, a buy-out price will also be applied in the analysis if the homeowners choose to
sell their home. This buy-out price is 60% of the prior assessed value. Regarding flood insurance, an
un-elevated structure will cost an annual flood insurance premium of $26,280 while elevated structure
will only cost $4,280. For this financial analysis, a discount rate of 4% will be utilized to discount
future cash flows and as a rate of return on investments.
The financial analysis of the choices for homeowners is based on four different scenarios. In
the first scenario, the homeowners choose to elevate their house’s structure and apply for cheaper flood
insurance. In the second scenario, the homeowners choose to repair the house, but they do not elevate
the structure. The homeowners also must pay more expensive flood insurance. Both scenario 1 and 2
require the calculation of house sale in the last year (year 21). In the third scenario, the homeowners
decide to sell their house at a lower price to a government body or developer. Under this scenario, the
homeowners must pay off the mortgage and then can invest the rest, which will earn the same return as
the annual discount rate. The homeowners will rent a house at the same annual cost as the previous
annual mortgage payments (rents remain constant over time). In the fourth scenario, the homeowners
choose to abandon their house. Under this scenario, the homeowners also must rent housing at the same
cost as the previous mortgage payment. However, to satisfy this condition, the bank foreclosures on the
original property and captures the entire value of the property.
A cash flow statement was formulated for each scenario as a part of the financial analysis which
included four components: income, expenses, net cash flow, and discounted cash flow. The total
household income consists of the initial annual housing allotment, house sale proceeds in the last year
(applied in scenario 1 and 2), buy-out sale proceeds (applied in scenario 3), and interest income from
investment. The expenses made up of primary mortgage (rental payment), secondary mortgage
payment, property taxes, and flood insurance. Net cash flow for each year was calculated by subtracting
total income from total expenses. Then, using the concept of the time value of money, the discounted
cash flow was calculated by utilizing the discount rate of 4%. The discounted cash flow gives us a
better understanding in valuing the property based on scenarios since discounting back to the present
will make the values comparable and avoid misleading profit calculation. Finally, the net present value
(NPV) of the discounted cash flow and the percentage of annual income allocated to housing expenses
were also presented in the analysis.

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 In order to examine the change of the NPV value and the percentage of income allocated to
housing costs when several circumstances occur, test sensitivity was conducted by exploring four
different conditions: 1). Property tax rate doubles from 2.545% to 5.09%; 2). The cost to elevate the
house increases by 50%; 3). Cost of flood insurances doubles for both elevated structure and un-
elevated structure; and 4). Household income drops by 25% due to retirement, resulting in annual
median household income of $59,145.

Discounted Cash Flow

Table 2 shows the discounted cash flow applied to all scenarios, including the provision of test
sensitivities for each scenario. Scenario 1, where the homeowners elevate their structure and access
cheaper flood insurance, predicts deficit cash flows from the initial year to year 13. This happens
because scenario 1 include the expenses for secondary mortgage payment that has a 15-year term of
payment that need to be paid for the initial year (2013) until year 14 (2027). However, a positive
discounted cash flow is found in year 14 since the total income is still higher than the total expenses.
This secondary mortgage payment is included in scenario 1 due to the need to cover the cost to refurbish
and elevate the house.
Scenario 2, where the homeowners choose to repair the property, pay high flood insurance, but
do not elevate the property structure, estimates deficit cash flows over the time span under analysis
except for the year 21 (2034) since the homeowners gain significant income from the house sale
proceeds in that year. In this scenario, higher flood insurance premium paid by the homeowners gives
more significant impact on deficit cash flows than the cost of property improvements.
Scenario 3, where the homeowners choose to sell their house at a low price, predicts positive
discounted cash flows for each year. This happens because the homeowners earn higher income due to
buy-out sale proceeds in the initial year and the interest income from investment received since year 1,
while they only need to cover the cost of the primary mortgage payment for their rent. Other expenses
that applied in scenario 1 and 2, such as secondary mortgage payment, property taxes, and flood
insurance is not applicable in scenario 3 since they are no longer own the house. Scenario 4, where the
homeowners choose to abandon their house, also estimates positive discounted cash flows for each year
but are lower than the discounted cash flows predicted in scenario 3. This happens because the
homeowners do not earn income from the house sale proceeds that is applicable as in scenario 3.

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Table 2. Discounted Cash Flow and Test Sensitivities for All Recovery Scenarios, Highlands, New Jersey

Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
Scenario 1
Base -$3,446 -$3,084 -$2,742 -$2,420 -$2,116 -$1,830 -$1,562 -$1,309 -$1,072 -$849 -$641 -$446 -$264 -$94 $65 $3,184 $3,207 $3,224 $3,236 $3,243 $3,246 $268,556
Sensitivity 1 -$11,249 -$10,812 -$10,396 -$10,000 -$9,623 -$9,265 -$8,925 -$8,602 -$8,294 -$8,003 -$7,725 -$7,462 -$7,213 -$6,976 -$6,751 -$3,566 -$3,479 -$3,397 -$3,321 -$3,251 -$3,186 $262,186
Sensitivity 2 -$6,122 -$5,657 -$5,216 -$4,799 -$4,403 -$4,030 -$3,676 -$3,342 -$3,027 -$2,729 -$2,449 -$2,184 -$1,935 -$1,701 -$1,480 $3,184 $3,207 $3,224 $3,236 $3,243 $3,246 $268,556
Sensitivity 3 -$7,726 -$7,199 -$6,699 -$6,225 -$5,775 -$5,348 -$4,944 -$4,561 -$4,199 -$3,857 -$3,533 -$3,226 -$2,937 -$2,664 -$2,407 $807 $921 $1,027 $1,123 $1,212 $1,292 $266,678
Sensitivity 4 -$9,361 -$8,885 -$8,431 -$8,000 -$7,589 -$7,198 -$6,826 -$6,472 -$6,135 -$5,816 -$5,512 -$5,223 -$4,949 -$4,689 -$4,442 -$1,236 -$1,128 -$1,028 -$934 -$847 -$765 $264,622
Scenario 2
Base -$21,076 -$19,972 -$18,917 -$17,909 -$16,947 -$16,029 -$15,153 -$14,317 -$13,519 -$12,759 -$12,033 -$11,342 -$10,683 -$10,055 -$9,456 -$7,103 -$6,629 -$6,179 -$5,750 -$5,344 -$4,957 $184,918
Sensitivity 1 -$26,650 -$25,492 -$24,383 -$23,323 -$22,309 -$21,340 -$20,413 -$19,526 -$18,678 -$17,868 -$17,094 -$16,353 -$15,646 -$14,970 -$14,325 -$11,925 -$11,405 -$10,908 -$10,434 -$9,982 -$9,551 $180,368
Sensitivity 3 -$47,356 -$45,241 -$43,214 -$41,272 -$39,411 -$37,629 -$35,922 -$34,288 -$32,722 -$31,223 -$29,787 -$28,413 -$27,097 -$25,838 -$24,632 -$21,696 -$20,660 -$19,670 -$18,723 -$17,817 -$16,951 $173,386
Sensitivity 4 -$26,991 -$25,772 -$24,606 -$23,489 -$22,420 -$21,396 -$20,417 -$19,480 -$18,583 -$17,725 -$16,904 -$16,119 -$15,368 -$14,650 -$13,963 -$11,523 -$10,964 -$10,430 -$9,920 -$9,433 -$8,968 $180,985
Scenario 3
Base $50,821 $15,322 $15,233 $15,139 $15,041 $14,938 $14,830 $14,719 $14,605 $14,487 $14,367 $14,243 $14,117 $13,989 $13,859 $13,727 $13,594 $13,459 $13,323 $13,186 $13,047 $12,909
Sensitivity 4 $44,907 $9,521 $9,544 $9,559 $9,568 $9,570 $9,566 $9,557 $9,541 $9,521 $9,496 $9,466 $9,432 $9,394 $9,352 $9,307 $9,259 $9,207 $9,153 $9,096 $9,036 $8,975
Scenario 4
Base $13,988 $13,905 $13,816 $13,723 $13,624 $13,521 $13,414 $13,303 $13,188 $13,071 $12,950 $12,826 $12,701 $12,573 $12,442 $12,311 $12,177 $12,042 $11,906 $11,769 $11,631 $11,492
Sensitivity 4 $8,074 $8,104 $8,127 $8,143 $8,152 $8,154 $8,150 $8,140 $8,125 $8,104 $8,079 $8,049 $8,015 $7,977 $7,936 $7,891 $7,842 $7,791 $7,736 $7,679 $7,620 $7,558

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Net Present Value and Percentage of Income Allocated to Housing Costs
Table 3 shows the net present value (NPV) for each scenario after calculating benefit and cost
cash flows. NPV is a useful indicator for the homeowner to decide what kind of actions that yield the
most benefits. A positive NPV is apparent in scenario 1, 3, and 4, meaning that the estimated earnings
generated by these actions exceed the anticipated expenses. In contrast, a negative NPV is found in
scenario 2, where the homeowners choose to repair but do not elevate the structure and pay higher flood
insurance, indicating a net loss. Therefore, scenario 2 is not preferable as it is predicted not generate
profit for the homeowner. This happens due to higher flood insurance premium paid that resulted in
higher total expenses. Thus, this scenario also has the largest percentage of income allocated to housing
costs with an average percentage of 48%, as can be seen in Table 4. The scenario that yields the highest
positive NPV is scenario 3 where the homeowners sell the house at a low price to the government or a
developer. This scenario also has the lowest percentage of income allocated to housing costs with an
average of 10%. This happens because income generated in this scenario is higher due to house sale
proceeds and interest income from the investment of the house sale proceeds, while at the same time,
the expenses for secondary mortgage payment, property taxes, and flood insurance are not applicable.
However, this NPV should be carefully interpreted with several assumptions and limitations.
The rent payment grows at a constant rate, and the investment rate for house sale proceeds follows the
same discount rate at 4%. We also assume that the 4% discount rate is the stable and appropriate rate
to discount the estimated cash flows from each scenario. To make the calculation more realistic, the
financial analysis could consider other factors, such as inflation and other possible taxes.

Test Sensitivities
Test sensitivities were conducted to compare the effect of different sensitivities on the NPV to
the base condition. In scenario 1, sensitivity 1 is the most sensitive to the NPV where the NPV decrease
by 58% after the property tax rate doubles. Sensitivity 1 also produces the largest percentage of income
spent on housing in this scenario (see Table 4). However, according to table 5, the largest maximum
percentage of income spent on housing costs is apparent in the test sensitivity 4 as the household income
decreases. In scenario 2, NPV and the percentage of income allocated to housing costs are significantly
changed if the cost of flood insurance doubles for both elevated and un-elevated structure (sensitivity
3). Scenario 3 and 4 only applied sensitivity 4, where the annual household income decreases by 25%.
This sensitivity still resulted in positive NPV in scenario 3 and 4. We assume that a 25% reduction in
income is still profitable for the homeowner if they choose to sell or abandon their house. The average
percentage of income allocated to housing increases by approximately 3% after applying this sensitivity
4.
This section will examine the effect of test sensitivities on discounted cash flows for each
scenario. In scenario 1 and 2 where the homeowners still own the house, after doubling the property
tax rate (test sensitivity 1), the negative discounted cash flows occur in each year except in the last year
(see Table 2). A double property tax rate resulted in doubled property tax expenses. Therefore, as the
income remains stable, this circumstance will result in more negative values of discounted cash flows.
Test sensitivity 2 (increasing the cost to elevate the house by 50%) that only applied in scenario 1 will
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result in higher annual payment for secondary mortgage. Thus, negative discounted cash flows are
found in the initial year until year 14 under scenario 1. Test sensitivity 3 where the cost of flood
insurance premium doubles are also applicable in scenario 1 and 2. The negative discounted cash flows
are found in the initial year until year 14 under scenario 1, while under scenario 2, the negative
discounted cash flows are found in each year except in the last year. Sensitivity 4 tests what happens
to the discounted cash flows after household income drops by 25% due to retirement. This test
sensitivity resulted in lower discounted cash flows in each year for both scenario 3 and 4.

Table 3. Net Present Value for All Recovery Scenarios, Highlands, New Jersey
Net Present Value (NPV)
Base Sensitivity 1 Sensitivity 2 Sensitivity 3 Sensitivity 4
Scenario 1 $266,084 $110,688 $235,144 $201,759 $159,158
Scenario 2 -$71,211 -$182,207 n/a -$466,177 -$178,136
Scenario 3 $348,955 n/a n/a n/a $242,029
Scenario 4 $282,372 n/a n/a n/a $175,446

Table 4. Percentage of Annual Income Allocated to Housing Costs for All Recovery
Scenarios, Highlands, New Jersey
Percentage of Income Allocated to Housing Costs
Base Sensitivity 1 Sensitivity 2 Sensitivity 3 Sensitivity 4
Scenario 1
Average 30% 40% 32% 34% 39%
Minimum 24% 36% 24% 27% 32%
Maximum 34% 44% 38% 40% 46%
Scenario 2
Average 48% 55% n/a 75% 63%
Minimum 39% 47% n/a 61% 52%
Maximum 57% 64% n/a 90% 76%
Scenario 3
Average 10% n/a n/a n/a 13%
Minimum 8% n/a n/a n/a 10%
Maximum 12% n/a n/a n/a 16%
Scenario 4
Average 10% n/a n/a n/a 13%
Minimum 8% n/a n/a n/a 11%
Maximum 12% n/a n/a n/a 16%

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Table 5. Percentage of Annual Income Spent on Housing and Test Sensitivities for All Recovery Scenarios, Highlands, New Jersey

Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
Scenario 1
Base 34% 34% 34% 33% 33% 33% 32% 32% 32% 31% 31% 31% 30% 30% 30% 25% 24% 24% 24% 24% 24% 24%
Sensitivity 1 44% 44% 44% 43% 43% 43% 43% 42% 42% 42% 42% 42% 42% 41% 41% 36% 36% 36% 36% 36% 36% 36%
Sensitivity 2 38% 37% 37% 36% 36% 36% 35% 35% 34% 34% 34% 33% 33% 33% 32% 25% 24% 24% 24% 24% 24% 24%
Sensitivity 3 40% 39% 39% 38% 38% 37% 37% 37% 36% 36% 35% 35% 35% 34% 34% 29% 28% 28% 28% 28% 28% 27%
Sensitivity 4 46% 45% 45% 44% 44% 43% 43% 43% 42% 42% 41% 41% 41% 40% 40% 33% 33% 32% 32% 32% 32% 32%
Scenario 2
Base 57% 56% 55% 54% 53% 52% 52% 51% 50% 49% 49% 48% 47% 46% 46% 42% 41% 41% 40% 40% 39% 39%
Sensitivity 1 64% 63% 62% 61% 61% 60% 59% 58% 58% 57% 56% 56% 55% 54% 54% 50% 50% 49% 49% 48% 48% 47%
Sensitivity 3 90% 88% 87% 85% 84% 83% 81% 80% 78% 77% 76% 75% 73% 72% 71% 67% 66% 65% 64% 63% 62% 61%
Sensitivity 4 76% 74% 73% 72% 71% 70% 69% 68% 67% 66% 65% 64% 63% 62% 61% 56% 55% 55% 54% 53% 52% 52%
Scenario 3
Base 12% 12% 12% 11% 11% 11% 11% 10% 10% 10% 10% 10% 9% 9% 9% 9% 9% 9% 8% 8% 8% 8%
Sensitivity 4 16% 16% 15% 15% 15% 14% 14% 14% 14% 13% 13% 13% 13% 12% 12% 12% 12% 11% 11% 11% 11% 10%
Scenario 4
Base 12% 12% 12% 12% 11% 11% 11% 11% 10% 10% 10% 10% 10% 9% 9% 9% 9% 9% 9% 8% 8% 8%
Sensitivity 4 16% 16% 16% 15% 15% 15% 15% 14% 14% 14% 13% 13% 13% 13% 12% 12% 12% 12% 11% 11% 11% 11%

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IV. Conclusion

After conducting fiscal impact and financial analysis from two perspectives, it can be concluded
that the municipality and the homeowner have a different preference for alternative recovery scenarios.
According to fiscal impact analysis, the municipality is more likely to allocate money to the scenario
where 1,200 housing units and 35 business properties elevate their structures. In contrast, a financial
analysis of the choices the homeowner faces resulted in the scenario where the homeowner sells the
house at a low price as the most favorable outcome. The positive net fiscal impact on the municipal
budget is also apparent in the scenario where the properties are repaired, but the structures are not
elevated. However, since this scenario yields a negative NPV in the homeowner’s financial analysis,
this scenario would not be preferred. The scenario that can compromise both parties are scenario where
the homeowner elevates their properties’ structures as it generates the most favorable outcome for the
municipality but still yields a positive NPV in the homeowner’s financial analysis. But, the fact that
this scenario implies a higher percentage of income spent on housing for the homeowner should be
taken into consideration. Such incentive packages for the homeowners need to be formulated to find
solutions that work both parties.

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 References

Listokin, David, et al. Who Lives in New Jersey Housing? Center for Urban Policy Research,
Edward J. Bloustein School of Planning and Public Policy, Rutgers University. New
Brunswick, New Jersey: November 2006.
US Census Bureau. (n.d). Bedrooms. 2011 ACS 5-year Estimates. Retrieved April 12, 2018, from
http://factfinder2.census.gov.

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