CAPITOLA (AP) -- A row of beachfront, Mediterranean-style cottages in bright pink, green, turquoise and yellow beckons tourists at the Capitola Venetian Hotel, who sunbathe on deck chairs and splash in the Pacific waves. But in his nearby office, owner Steven Allen is worrying about flood insurance.
In wet winters, Soquel Creek storms past his downtown Capitola hotel in a rage of muddy water and fallen redwoods after a 16-mile run through the Santa Cruz Mountains.
As the creek empties into the Pacific, high tides, storm surges and wild waves push back, inundating on local businesses. The beachfront hotel can get hit from both sides.
For years, the federal government subsidized many flood insurance policies.
But premiums haven't covered payouts, and now, billions of dollars in debt, the National Flood Insurance Program is reducing its assistance. For Allen and thousands of Californians living near the ocean, rivers and creeks, this means their flood insurance costs are on the rise.
Statewide, more than 48,000 home and business owners received subsidies in 2012 for their flood insurance through the federal program.
Those policies could rise up to 18 percent each year for homeowners; second homes and businesses will see mandatory increases of 25 percent every year until they drop out of the subsidy program and get a rate based on the actual risk of flooding.
More than half of policyholders in communities including the city of Monterey, San Rafael and Long Beach who had subsidized flood insurance will face higher premiums in coming years.
In Capitola, 71 percent of those with flood insurance face higher rates.
Those hikes are “a big concern,” said Allen, noting that the cost of flood insurance affects property values.
His family has owned the Venetian for decades and can absorb the increase, but for future buyers, or sellers, the expense may price them out of the market.
“Not the best news just coming out of a multi-year real estate recession,” Allen said.
A historic community of 10,000, Capitola is known as the Jewel Box for its adorable boutiques, coffee shops and ocean front bistros.
To fend off flooding, the city has wooden storm gates to keep out waves.
Sand bags, even this dry winter, are piled in front of most homes and businesses, just in case.
Yet, the city itself can't afford to pay flood insurance, leaving the police and fire stations and City Hall vulnerable.
“It's just beyond our reach,” said Lisa Murphy, Capitola administrative services director.
When heavy rains caused a culvert to collapse in 2011, deluging the town, Murphy said they learned most local business owners also didn't have flood insurance.
“It's extremely expensive to have flood insurance and floods are rare,” she said. “People try to roll the dice.”
Nationally, market studies have shown that generally only half of the people in flood hazard zones actually get the insurance.
And unless people are required to get flood insurance as a condition of their mortgage, they almost never buy it.
Standing on the brick patio of his romantic, century-old Shadowbrook Restaurant, Ted Burke recalls the last time a flood washed through.
He watched the creek crest, boarded up windows and pumped slate floors dry.
“The water just came up and up,” he said. “Where I'm standing now, this was plywood, and it just washed away.”
Burke said he dropped his $500,000 flood insurance policy two years ago when ever-rising annual costs hit $2,000.
With a $10,000 deductible, it just didn't seem worth it. Now, facing a 25 percent increase, he's not inclined to renew.
“I just don't think the risk-reward equation is in balance,” he said.