The terms are in reference to what floodplain the home is built in. Each area of the Keys has been mapped to determine flood zones for each area. For instance, if the home you're considering buying is in a flood zone AE9, then the lowest finished level of the home needs to be at least 9 feet above sea level. If the lowest finished elevation of the home is below 9 feet, that portion of the home is said to be below flood.
The Land Development Regulations of Monroe County do provide for the construction, with a building permit, of a limited amount of storage area below the flood level. But that area must be storage only. It cannot be finished off as a separate living area. Living area generally means an enclosed area that has electricity, plumbing, finished walls or flooring and/or is air conditioned or otherwise suitable for living or actually being utilized as living area.
What are the consequences of owning a home with an illegal, below flood living are?
Flood Insurance: FEMA, the source for flood insurance in the Keys, is requiring homeowners to complete and inspection with Monroe County to certify that the home does not have an illegal downstairs enclosure. Failure to allow such inspection could prevent you from obtaining flood insurance, which is a condition of most mortgages.
Code Enforcement Violation: Monroe County is currently actively enforcing a ban against illegal below flood enclosures. The County can insist the structures be removed and impose serious fines against the property ($250 per day) until the structure is removed. Note that it does not matter if the current homeowner enclosed the structure or if it was there when he purchased it.
Future Improvements: If you apply for a building permit, Monroe County will require an inspection of your property prior to obtaining a permit. If your home or the home you are considering buying has an illegal enclosure, you will not be able to obtain building permits and legally perform any work on the home unless and until you remove the illegal enclosure or modify it to conform to the law.
Exceptions: Naturally, there are a few exceptions. Some homes have legal living areas below the flood level that were permitted and built before the enactment of prohibition ("Pre-Firm", December 31, 1974). These structures are considered to be legal, non-conforming. As a rule, they may be kept, but they may have to be removed if the home is re-built (after damage from storm, fire, flood, etc) or if the property is significantly renovated so as to require the house to be in compliance with the present Land Development Regulations.
For more information, please see the following document prepared by Russel Yagel of Hershoff, Lupino & Yagel, Attorneys at Law. It is an excellent source of information regarding the permitting process in Monroe County.
A Guide to Understanding the Residential Building Permit Process and Flood Insurance Issues in Monroe County, Florida.