The ATmega vitrualizes all of the Z80 I/O space.  The CP/M BIOS makes function calls to the ATmega firmware package.  Floppy discs are not emulated as such.  Instead, all discs are treated as hard discs and vitualized to directories on the SD card.  For example, CP/M drive A: is mapped to directory A on the SD card.  Disc reads and writes work on the corresponding SD card directory.   

Cool project, I was also toying with the idea of how many chips exactly are needed for a most basic CP/M computer? Turns out essentially 3 - CPU, RAM, all the glue in Arduino. But I am not clear how does Arduino present to CP/M the floppy format from the SD card? Does it emulate some of the well known FDCs of the era (for example: https://www.smbaker.com/z80-retrocomputing-part-14-rc2014-floppy-controller-boards ) or some other way? It would be cool to add software components (and/or github links) too.

Hi! I working on a robotics project... Check it out! Do drop a like too :P

https://hackaday.io/project/165046-autonomous-navigation