Contractor Craig Schusterick, left, stands in front of his three story, 2,860 square foot home on Balboa, replacing the previous cottage that was on the property before. (Don Leach, Daily Pilot / May 3, 2013)

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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."

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Routine audit

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.