Although spending money is never easy, financial incentives and cost/benefit analyses available today support the choice of retrofitting apartment buildings for earthquake safety.
There are several key factors to consider when contemplating a seismic retrofit for an earthquake-prone building:
- Risk based on the building’s type, age and location
- Anticipated cost of the retrofit work
- Overall value of the property
- Financial incentives such as reduced mortgage rates, tax benefits, reduced insurance premiums, expedited permitting, and property-assessed financing,
- Business continuity and reduced earthquake liability, and
- Enhanced marketability and value of an earthquake resilient property.
For many owners, however, near-term cost recovery is frequently the deciding factor in making this choice.
If a building owner can quickly recoup some of the costs of the retrofit, the project is often considered more feasible. Yet the other sizeable factors noted above are often not looked at as “real dollars” that can easily make retrofits pencil out as worthwhile investments. This evaluation may also need to consider increased rents that help pay for the project, or enhanced value and marketability of the property.
A study by the Australian Earthquake Engineering Society found that 90% of property owners said cost-recovery was the biggest influencer for retrofitting their buildings. One respondent said a crucial strategy for managing the cost of improved seismic performance is to roll costs into a larger upgrade. Adding other construction work to a seismic retrofit can significantly enhance the overall value of a project through cost-efficiency, reduced labor and materials costs and a shorter construction timeline because all work can be done simultaneously.[i]
Weighing the risks
The closer you are to an active fault, the more likely your building is to be damaged by seismic activity. A network of major faults crisscrossing California creates a grim seismic scenario where one or more might rupture – perhaps even simultaneously – causing what scientists say could be an epic magnitude 7.5 earthquake.
The United States Geological Survey determined that 300,000 structures could be damaged in a 7.8 San Andreas earthquake. That’s one in every 16 buildings in the region.
And the odds of a massive quake striking are much more likely than one may suspect. The USGS estimates a 99% chance in the next 30 years of another Northridge-size earthquake occurring in California. (The Northridge quake, measuring 6.7 on the Richter scale, damaged or destroyed more than 82,000 structures, killed 60 people, and injured 9,000 in 1994.)[ii]
Even more dramatic is the 45% likelihood of a major quake of magnitude 7.5 or greater in the next 30 years. A quake of that size is projected to cause widespread devastation. Recent estimates put damages caused by a magnitude-7 earthquake on the Puente Hills fault running through downtown Los Angeles at more than $252 billion with thousands killed and hundreds of thousands displaced.[iii]
In fact, Los Angeles County ranks as No. 1 for estimated annualized earthquake loss at 30.6 percent of the nation’s total, the United States Geological Survey reported. A recent study at U.C. Berkeley performed by the California Geological Survey supported that finding, ranking potential damage in Southern California higher than that of any other part of the state, including San Francisco. Major reasons the USGS put L.A. County at the top of annualized earthquake loss have to do with the population density, the types of buildings located here and the likelihood that they may be damaged when a major quake strikes.
The Bay Area is another California hotspot for quakes, notorious for the Great San Francisco earthquake of 1906, and the Loma Prieta earthquake in 1997.
San Diego is also at risk. Its Rose Canyon Fault runs right through the middle of the city — from the Silver Strand to La Jolla — snaking its way under lofty skyscrapers, commercial districts and apartment buildings that draw tens of thousands of people each day. Seismologists agree that the Rose Canyon Fault, while relatively inactive, has the capacity for a 7.0-magnitude quake similar to those in Ridgecrest. And when it does strike, the damage caused would be colossal, estimated between $124 million and $13 billion.
When it comes to risk, we also know what types of structures are most likely to fail. Seismologists and structural engineers have identified certain buildings that are most likely to sustain damage in a major earthquake. These include:
- Soft-story built before 1978
- These structures, with parking on the ground floor and units built above, are prone to collapse during major earthquakes.
- Unreinforced Masonry built before 1975
- The facades of these buildings can collapse in a quake.
- Concrete Tilt-up built before 1994
- Weak connections can fail and cause walls to pull apart from the roof, presenting a collapse hazard.
- Non-Ductile Concrete built before 1977
- Limited lateral resisting capacity makes these structures brittle.
- Steel Moment Frame built before 1996
- These buildings can sustain brittle fracturing of the steel frames at welded joints between beams and columns.
The average age of a commercial building in the United States is about 50 years. Mixed-use development is about 75 years old on average, according to SMR Research Corporation.[iv] These structures were constructed in the 1950s to 1970s, and most are vulnerable to damage if in an earthquake prone region.
Making these structures more resilient can provide a high return on investment because of the potential to save lives, avoid liability and, when coupled with other upgrades, add to the life of a building and increase its value.
Costs of a retrofit
No two buildings are exactly alike, and every project is different. But there are some constants in the industry that can be applied to determining approximate costs for a seismic retrofit of a building.
A typical case study for a soft-story apartment building in Los Angeles might look something like this:
Apartment Building Value: $250,000 per unit
Retrofit Cost: $7,500 per unit
Cost/Value Ratio: .03
In this example, the retrofit cost would be approximately 3% of the total value of the building – and that’s without any cost-recovery advantages, which we will address later on.
What is a reasonable cost/value ratio for a retrofit?
Researchers at Caltech said seismic retrofits are cost-effective when projected annualized loss would be reduced by 50 percent or more at a cost that would equal no more than 10% of the replacement cost of a building.
The Federal Emergency Management Agency found similar cost benefits in a two-year analysis of seismic retrofit scenarios in California.
“The benefit/cost analysis suggests that a retrofit is strongly justified economically, even without including the value of life,” FEMA determined.
An overall net savings
A separate Caltech study determined that for every dollar spent in retrofitting soft-story structures, property owners could expect to save up to seven dollars, and that study didn’t factor in loss to contents, alternate living expenses or deaths and injuries – all of which would significantly increase the cost-to-benefit ratios.
How do these other factors play into the cost-benefit analysis? Each of these potential threats could lead to expenses that far exceed the replacement cost of a building. This puts a property owner in grave jeopardy if a structure is at risk of failing in an earthquake;
- Liability associated with damage, death and injury
- Loss of income when a building is destroyed or red-tagged to restrict occupancy
- Ongoing financial obligations tied to the original mortgage loan
- Demolition costs including abatement of asbestos and lead contaminants
- Reconstruction and code upgrade costs, as well as cost overruns of liability issues, loss of life, and loss of income during recovery
The good news is the costs of seismic retrofits are often affordable, resulting in a high return on investment.
The National Institute of Building Sciences found that retrofitting existing soft-story residential building stock can produce up to $16 dollars in benefit for every dollar spent.[v] Many smart building and business owners are taking the obvious next step: investing in resilience to stay in business after a major earthquake.
Consider a $100,000 investment in a $10 million retail property that would, in the event of a major earthquake, reduce damage from $5 million to $1 million and recovery time from one year to one week. This investment would likely spell the difference between bankruptcy and the ability to weather the disaster.
Some 40% of businesses that close for more than two weeks after a disaster never re-open, according to the Federal Emergency Management Agency.[vi] Resilience is a major concern to businesses wanting to avoid risk and weather hardships long-term.
Financial incentives:
Many government and financial institutions recognize the social and economic benefits of earthquake-fortified buildings and are offering financial incentives to encourage building owners to make their structures safer.
One of the more interesting nationwide tax incentive programs is Property Assessed Clean Energy (PACE). Established originally for the installation of solar panels, PACE programs allow the installation cost to be financed through property tax assessments rather than a traditional loan. The original owner does not have to shoulder the entire cost of the installation. Rather, subsequent owners who receive the advantage of the solar power share in the cost.
California and other states have made PACE funding available for property owners who invest in earthquake retrofits.[vii]
Commercial PACE programs were first started in 2008 as a financing tool for building owners wanting to invest in solar and energy-efficiency projects. These programs offered repayment on the loan via the property tax bill for a period of up to 30 years.
Today, the Commercial PACE (C-PACE) industry has expanded to offer solutions to building owners wanting to fortify their property against hurricanes, earthquakes and other natural disasters.[viii]
The United States Department of Energy has an active C-PACE program in California, providing these loans to help incentivize seismic safety and resilience by making it easier for owners to retrofit their buildings.
Case studies cited by the DOE indicated not only that the buildings retrofitted were safer, but that they enjoyed a higher marketability. In one instance, a retrofit project “attracted a key anchor rental tenant that had resiliency requirements.” [ix]
Fee waivers and tax incentives can also add up to significant savings.
California and several cities and counties within the state also offer exclusions from property tax assessments of the cost of construction to seismically strengthen buildings with retrofits or waivers of transfer taxes, etc.
Several examples include:
- San Francisco’s Earthquake Retrofit Exclusion[x]
- Santa Clara County’s Seismic Safety Construction Exclusion[xi]
- Berkeley’s Transfer Tax Reductions for Seismic Retrofit Work[xii]
- LA County ?????
Beyond these financial incentives, many cities also allow building owners to recover up to 50% of the cost of their retrofit in the form of increased rents to their tenants.
The City of Los Angeles has enacted a Seismic Retrofit Work Cost Recovery Program that allows building owners to recover up to 50% of the cost of their retrofit in the form of rent increases to their tenants.
Under this program, a building owner can recover up to half the cost of a retrofit through rent increases of a maximum of $38 per month for 10 years. And if that’s not enough time, the recovery period can be extended.
This is a great time to take action
Earthquakes are a real threat in California and the Pacific Northwest.
And we know what buildings are vulnerable to earthquake damage.
Given these facts and the financial incentives listed above, many building owners are pursuing seismic retrofits, coupled with other renovations, as an important solution to saving lives, protecting existing assets and ensuring the economic and social well-being of the community-at-large.
In Los Angeles alone, more than 4,500 apartment buildings have undergone seismic retrofits for earthquake resilience and many thousands more are going through the process.[xiii]
Just think about the impact that will have on saving lives, protecting property and well-being when the next Big One strikes.
If you’re thinking of having your building retrofitted for seismic safety, contact Optimum Seismic today for a free property evaluation. That’s the first step in assessing the right choice for your investment.
Ali Sahabi, a licensed General Engineering Contractor (GEC), is an expert in seismic resilience and sustainability. He is Chief Operating Officer of Optimum Seismic, Inc., which has in-house engineering, steel fabrication and construction services. Optimum Seismic has completed more than 3,500 seismic retrofitting and adaptive reuse projects for multifamily residential, commercial, and industrial buildings throughout California.
[i] Temitop Egbelakin, Suzanne Wilkinson: “Factors Affecting Motivation for Improved Seismic Retrofit Implementation,” 2008, Australian Earthquake Engineering Conference (AEES).
[ii] United States Geological Survey, “Progress toward a safer future since the 1989 Loma Prieta earthquake.” https://pubs.usgs.gov/fs/2014/3092/pdf/fs2014-3092.pdf
[iii] Earthquake Engineering Research Institute, “Loss Estimates for a Puente Hills Blind-Thrust Earthquake in Los Angeles, California,” Earthquake Spectra, Volume 21, No. 2, pages 329–338, 2005. https://earth.usc.edu/files/htdocs/papers/tjordan/2005_Field_EQSpectra_LossEstimates.pdf
[iv] SMR Research Corporation, http://www.commbuildings.com/ResearchComm.html
[v] National Institute of Building Science, https://www.nibs.org/page/mitigationsaves
[vi] Federal Emergency Management Agency, https://www.fema.gov/protecting-your-businesses
[vii] Clean Fund, https://www.cleanfund.com/news-and-events/news/seismic-retrofitting-burden-or-benefit/
Insert new ## 21 and adjust other ##s. “Earthquake Damage Estimates Hit $48.5 Million, Salt Lake County Officials Say,” McKellar, K. Desert News, April 9, 2020.
[viii] Clean Fund, https://www.cleanfund.com/news-and-events/news/seismic-retrofitting-burden-or-benefit/
[ix] United States Department of Energy, “Using CPACE Financing to Improve Efficiency and Resiliency in Buildings,” https://betterbuildingssolutioncenter.energy.gov/sites/default/files/slides/CPACE_for_Resiliency-slides.pdf
[x] San Francisco Assessor’s Office, https://www.sfassessor.org/tax-savings/exclusions/earthquake-retrofit
[xi] Santa Clara County, https://www.sccassessor.org/index.php/tax-savings/new-construction-exclusions/earthquake-retrofit
[xii] City of Berkeley, https://www.cityofberkeley.info/uploadedFiles/Online_Service_Center/Planning/SeismicRetroProgramGuidelines.pdf
[xiii] Los Angeles Department of Building and Health Safety, https://www.ladbs.org/docs/default-source/publications/misc-publications/soft-story-compliance-report.pdf
