Risk Management Series Incremental Seismic Rehabilitation of Retail Buildings Providing Protection to People and Buildings FEMA 399 June 2004 FEMA Appendix. Additional Information on Retail Building Facility Management Seismic Consideration Studies in California suggest that regional and local earthquake hazards (presence of faults and their proximity, regional earthquake history, geological and local site factors, etc.) have little if any influence on the levels of retail rental rates. Earthquake risk, in general, does not appear to translate into financial cost in the retail marketplace. Lenders and Insurers: Lenders and insurers are important external participants in many retail building acquisitions, and each carry out due diligence functions to determine the risks and potential liabilities in any given deal. By their nature, lenders and insurers spread their risks over a wider range of investments than that presented to an owner in a specific acquisition. The insurability of the acquired property is of great concern to retail building owners, but the cost of insurance is of lesser concern because the cost can usually be passed on to tenants in malls and other retail properties. Seismic Consideration Lenders and insurers usually employ engineering consultants to per-form the seismic portion of the due diligence, and they use proprietary programs to carry out the analysis. The most common analysis used is the Probable Maximum Loss (PML) analysis, which quantifies the percentage of the property that will be lost in a major earthquake. Such an analysis is referred to as deterministic, and it does not consider the damages and losses that could result from more moderate but more frequent earthquakes. Lenders and insurers establish their own proprietary criteria for acceptable PML. Lenders often require seismic due diligence in California and the Pacific Northwest, and the extent to which it is done in other seismic regions is not known. Risk Management: Many retail building owners have formally established internal risk management functions within their organizations. These risk managers participate in the due diligence analyses carried out prior to acquisition. The rigor of internal due diligence varies from owner to owner. Seismic Consideration The owners internal seismic due diligence, whether carried out by in-house staff or consultants, is the PML analysis. Owners establish their own proprietary criteria for acceptable PML. Some large owners limit their PML analysis to California, Oregon, and Washington. Depending on the deal, the PML leads to one of three decisions about the acquisition: Reject the deal if the PML exceeds a preset threshold Accept the deal with an initial rehabilitation Accept the deal without rehabilitation 2. The REDEVELOPMENT Phase of Retail Facility Management Typical Process The redevelopment phase of the typical retail facility management process consists of various types of capital improvements, and is influenced by significant internal and external pressures, as depicted in Figure 4. The types of redevelopment phase capital improvement projects vary as a function of the buildings classification (A, B, or C) as well as between malls and single tenant buildings. For malls they generally consist of: Architectural upgrading of entrances, lobbies, public areas, and parking structures Architectural upgrading of faades pool, or spa, and social, such as operating a lecture room or similar facility. The specific functions may vary depending on the building classification, A, B, or C. Occupancy functions are carried out in each building by the tenants and facil-ity managers in the case of malls, and by owners in the case of single tenant buildings. Each of these functions is subject to seismic risk and can be dis- rupted by seismic damage. Operation: Facility operation consists of all the activities and functions that the facility and its components must perform in order to support the occu-pancy. Examples are the mechanical functions (heating, cooling, and ventila-tion), electrical functions (lighting, communications, and alarm), and plumbing functions. Operation functions may be carried out by custodial staff of the owner and/or by contractors. Each of these functions is subject to seismic risk and can be disrupted by seismic damage. Maintenance: Maintenance includes all the activities required to enable the occupancy and operation of the building to be carried out continuously over time. They can be broken down into custodial maintenance, routine mainte-nance, and repair. Maintenance functions may be carried out by custodial staff of the owner and/or by contractors. In some cases, some maintenance functions in malls may be carried out by tenants or their contractors. Facility Assessment: Facility assessment, which less sophisticated retail building owners may not carry out systematically, consists of the survey or inspection of the retail buildings on a scheduled basis. It may also include a review of documents, such as archival building plans, for retrieving specific information. The purpose of the surveys or inspections is to determine facility conditions in relation to one or more of the following categories: user complaints structural hazards maintenance needs fire/life safety preventive maintenance needs environmental quality specific environmental hazards energy use/conservation asbestos accessibility lead paint other lead radon These surveys may or may not be coordinated as to schedule, content, per-sonnel, etc. Facility managers may or may not use prepared inspection forms or checklists. Finally, facility managers may vary as to the extent and specific nature of their record keeping and reporting. Influences and Related Seismic Considerations As indicated in Figure 5, one external factor (down arrow) and one internal factor (up arrow) influence current building use phase decision making. Federal and state programs: Various external programs may establish requirements affecting the building use phase that have facilities implications (e.g., Americans with Disabilities Act [ADA] and Occupational Safety and Health Administration [OSHA] requirements). Seismic Consideration Currently there are no seismic rehabilitation mandates or implications in any federal or state programs related to retail buildings, with the exception of California. Specific surveys or inspections may be mandated by federal, state, or local laws/programs. These surveys/inspections may be carried out by a variety of entities: Federal personnel (e.g., from OSHA, Environmental Protection Agency [EPA]) State/city/county personnel (e.g., fire marshal, code enforcement, environmental, health) Retail building personnel (e.g., custodial or facility managers) Retail building contracted personnel (e.g., asbestos inspectors) Consultant Seismic Consideration Currently there are no seismic survey or inspection mandates or implications in any federal or state programs related to retail buildings, with the possible exception of California. Complaints by Occupants: Internal complaints by tenants and/or shoppers are a potentially significant pressure on the facility management process. Seismic Consideration Rarely, if ever, have there been complaints about seismic vulnerability generated by retail building occupants and shoppers, with the possible exception of California. This is because seismic risk and seismic damage are not routine experiences in most regions of the United States. 4. The PLANNING Phase of Retail Facility Management Typical Process The planning phase consists of projecting and forecasting future needs. It can be carried out periodically or continuously, and it may vary as to the time period covered by the projections and forecasts. Planning functions may be carried out by the owner, with or without the assistance of consultants. Planning consists of two separate but related activities strategic planning and facility planning and is affected by significant internal and external pressures, as depicted in Figure 6. Strategic Planning: Strategic planning attempts to formulate future business strategy by analyzing and forecasting financial trends as well as national, regional, and local retail markets. Many owners acquire properties for a limited period of time, and many have an exit strategy in place at the time of acquisition. Strategic planning addresses such issues as: Should the property classification (A, B, or C) be upgraded or downgraded? Should the exit strategy be accelerated or prolonged? Should trends in the insurance market revise current investment programs? Should specific major capital investments be considered? The plan will identify the time frames in which each project is to be accomplished, and it may include cost estimates. If effective, the facility plan will be used as a budgeting tool and will provide direct inputs into the budget process. It should be revised and updated on a routine basis to reflect: Changes in the strategic plan (including market conditions) Revised facility assessments Budgeting and funding realities Facility planning usually begins at the individual building or project level and entails the flow of information up the management hierarchy for final capital decision making and budgeting at the owners headquarters. Influences and Related Seismic Considerations As indicated in Figure 6, two external factors (down arrow) and one internal factor (up arrow) influence planning phase decision making. Insurance Carriers and Brokers: External private property and liability insurance companies often require surveys or inspections of retail buildings on an annual or other scheduled basis. Insurance carriers are more than willing, when asked, to provide building owners with Loss Control and Prevention Reports that include recommendations for loss prevention. Insurance brokers also employ loss/risk specialists. Seismic Consideration Property insurers are unlikely to recommend extensive seismic improvements outside of California. In Utah, for example, they have recommended seismic bracing of sprinklers in hospitals as part of the life safety systems, but no other improvements. Government Mandates: Federal, state, and local government agencies may establish external requirements affecting facility planning in the planning phase. These requirements may have facility rehabilitation implications. Seismic Consideration Currently there are no seismic rehabilitation mandates or implications in any federal or state programs, with the exception of California. Board Policies: In terms of internal influences, boards of directors may occasionally adopt written policies on issues of business and social significance that can impact both strategic and facility planning. These policies guide the actions of the owner organization. Seismic Consideration Retail building owners boards may adopt policies addressing seismic issues, including seismic performance objectives and rehabilitation of retail buildings, either as a onetime or recurring incremental program. Capital Budgets: Capital budgets generally relate to the acquisition of buildings and major systems, the occurrence of which is not annual or repetitive and which can therefore be amortized. The distinction between capital and maintenance budgets may vary among different retail building owners. At one extreme is a total separation, mandated by law, labor jurisdiction, or other factors. At the other extreme is a rather unclear separation between the two funding mechanisms. Maintenance Budgets: Maintenance budgets generally relate to recurring annual expenditures and address existing inventories of buildings and systems without adding to the inventories. Insurance Budgets: Financial resources earmarked for insurance may be used in different ways, including the purchase of third party insurance, and/ or the funding of a self-insurance reserve. Property and general liability insurance are relevant to facility management considerations. Influences and Related Seismic Considerations As indicated in Figure 7, two external factors (down arrow) and two internal factors (up arrow) influence planning phase decision making. Government Fiscal Regulations: Federal, state, and local government agencies have historically established external requirements dealing with fiscal responsibility of commercial property owners. A variety of Securities and Exchange Commission regulations apply to REITs. Pension funds are subject to a variety of fiduciary requirements. Partnerships are subject to a variety of state and federal regulations. One important objective of these regulations is to assure the responsible stewardship of someone elses re-sources. These requirements may have facility rehabilitation implications if resources are expended in an irresponsible manner. Additionally, these regulations may determine, directly or indirectly, the length of time an acquired real estate asset must be held and, therefore, what the owners planning horizon should be. Seismic Consideration As far as is known, there have been no seismic considerations attendant to these fiscal regulations. Lender Requirements: Commercial lenders impose requirements on building owners who use mortgage financing for capital improvements. Often, the lender requires the purchase of a particular type of insurance coverage. Seismic Consideration In California, lenders sometimes require the purchase of earthquake insurance as a condition of the loan. For some commercial office building loans, this requirement has been waived when the owner includes seismic improvements in the project that reduce the lenders risk below a defined threshold. The same consideration may apply to retail buildings. Risk and Insurance Management: Internally, the owner organizations risk and insurance management may have a direct or indirect role in the budget phase of the process, regarding the decisions related to insurance. Seismic Consideration In areas of seismic hazard, the risks of building loss or damage, occupant death or injury, and retail building owner liability must all be assessed. It must be decided whether to seek earthquake property and liability insurance coverage. Insurance companies that offer such coverage do not usually offer incentives to customers to undertake loss reduction measures in the form of seismic rehabilitation. How-ever, this situation might change, and insurance incentives for seismic rehabilitation may become subject to negotiation. Retail building owners can fund their budgets by various combinations of equity and debt. Influences and Related Seismic Considerations As indicated in Figure 8, two external factors (down arrow) influence funding phase decision making. Regional and Local Economic Conditions: Externally, the funding of retail building construction is subject to local and national socioeconomic conditions well beyond the control of the building owner. Construction funding depends on interest rates, the owners bond rating, and similar parameters. Seismic Consideration Even though seismic rehabilitation is clearly a risk reduction activity, there is no evidence that any building owner has improved its bond rating as the result of undertaking seismic mitigation activities of any kind. Bond Financing Regulations: Local administrative procedures and structure in place to obtain bond financing will have a significant impact on the ability of retail building owners to achieve their objectives, regardless of whether they include seismic risk reduction or not. Certain types of expenditures out of the proceeds of a bond issue, such as operations or maintenance, may be prohibited by the conditions of the bond. Seismic Consideration Some seismic rehabilitation increments may be classified as repair or maintenance work, and thereby be precluded from a capital improvement bond. Experience with bond-financed incremental seismic rehabilitation has been limited to school districts, and the most extensive is that of the Seattle Public Schools program. Seattles experience may be of interest to some retail building owners. Seattle Public Schools used two types of bonds to fund its program. Capital Levy Bonds were used to fund projects with smaller seismic rehabilitation increments categorized as repair and major maintenance. Capital Improvement Bonds were used to fund major projects categorized as modernization of hazardous buildings. This distinction was necessary because of Washington state law. Similar distinctions may be required in other parts of the country. 7. The Maintenance & Rehabilitation IMPLEMENTATION Phase of Retail Facility Management Typical Process The implementation phase includes design and construction and can be bro-ken into three categories of projects, all of which are relevant to existing buildings: Building acquisition projects Capital improvement projects Maintenance projects The implementation phase is primarily affected by external federal and state programs and building code requirements, as depicted in Figure 9. Seismic Consideration Codes do not mandate seismic rehabilitation in repair and alteration projects, though additions must comply with building code seismic requirements. Incremental seismic rehabilitation is consistent with most building code requirements applicable to existing buildings.