By Steven Ganz

The following is an excerpt from an article published by the Western States Seismic Policy Council. The ideas in the article are not necessarily the opinions of the Western States Seismic Policy Council, its members or its sponsors.

I am offering constructive, and maybe controversial, ideas designed to create market-driven and government-mandated mitigation incentives.”

A comprehensive package of incentives needs to be developed that will effectively encourage mitigation. Mitigation should not just occur for the sake of mitigating. Mitigation needs to make financial sense and should be implemented on a case by case basis. Incentives that distort the cost-benefit relationship for mitigation need to be avoided.

Link Mitigation Costs To Properties

Encourage earthquake retrofit projects by offering loans that remain with the property after ownership is transferred. If it is assumed that mitigating a structure will not actually increase the value of that property, then the current owner bears the full cost of any mitigation project without the ability to recoup any of the investment. So if an owner is choosing between retrofit and upgrading a bathroom, which will increase the property resale value, the bathroom will usually get the nod. However, if the expense of mitigation is linked to the property, future owners will share in that expense and thus reduce the cost to the current owner.

This concept may work on residential properties, but will not necessarily work for commercial property. Commercial real estate is generally priced by calculating a rate of return from the income that a property can generate. Any long-term mitigation costs will be calculated against any rents and will subsequently reduce the price of the building by an amount equal to the present value of the mitigation project.

Accelerated Depreciation or Tax Credits

Federal and state governments should offer accelerated depreciation or tax credits for hazard mitigation capital improvements. As explained above, current owners of commercial real estate would be unlikely to share the costs of mitigation with future owners. In order to create an incentive for current commercial real estate owners, accelerated depreciation or tax credits will make retrofit projects more affordable.

Link Mitigation to Insurance

Retrofitted homes should qualify for earthquake insurance premium discounts. Three factors are key in making a discount program successful. First, standards for the quality of work need to be established. Second, different forms of mitigation should receive different discounts. Third, the more mitigation efforts a homeowner undertakes, the greater the discount the homeowner should receive. However, to accurately provide these discounts there needs to be more research about the effectiveness of the different forms of mitigation.

Link Mitigation to Property Taxes

Link mitigation to a property tax reduction. A reason for local governments to offer this program is that if structures are properly mitigated, communities will save money in areas such as emergency response and infrastructure repair or replacement. A system of standards would need to be established for the discounts on property taxes similar to the previously described insurance discount.

Link Mortgages and Earthquake Insurance

Lending institutions need to encourage the purchase of earthquake insurance. In most cases mortgage lenders own at least 80% of newly purchased homes. With this scenario in mind, a homeowner does not have much incentive to purchase earthquake insurance to cover the full value of a home, especially when most policies currently have a 15% deductible. This means a homeowner would be paying the premium based on the full value of the home, but will be insuring only a small portion of their equity. The primary beneficiary of the insurance would be the lender.  Obviously, having earthquake insurance on a property is in the lender’s best interest. Earthquake insurance protects the lender from a borrower "walking away" from a destroyed property and thus defaulting on the mortgage.

Expand Legal Liabilities

Building owners should be held liable for not evaluating their properties’ structural deficiencies and for not undertaking reasonable measures to address any of these deficiencies. The judicial case law is expanding in the area of liability when building owners are found to have knowledge of deficiencies in their properties, but fail to act and retrofit. This form of limited legal liability encourages the building owner to use numbers that more accurately reflect the full cost of not mitigating when deciding whether or not to mitigate. However, it also creates a disincentive for building owners to avoid finding out what, if any, are the physical deficiencies in their buildings.

Rate Businesses

Businesses should be rated on their mitigation efforts and the implementation of their emergency response plans. The effect of such a rating would be reflected in a company’s stock valuation if it is publicly traded and would be reflected in cost-terms with contracts and partnership for all companies. If the rating information were readily available, businesses could ask the question, "Would I prefer to conduct a long-term business relationship with a company that has mitigated and has a disaster recovery plan or one that does not?"

Rate Individuals and Communities

Metropolitan areas and individual cities need to be publicly rated for hazard management. A metropolitan area rating system would be based on items such as the standards of construction and preparedness of their utility, transportation and communication infrastructure networks. The local community rating would be based on their mitigation, preparedness, response and recovery capabilities. Such a rating system could effect a business’s decision regarding where to locate and may instill political pressure on elected officials to improve their rating.

Develop Seals of Approval

Develop standardized and effective seals of approvals for products and homes. Currently a big problem with mitigation and risk management is information or the lack thereof. These seals would be effective only if there is a broad base of understanding and support for standards and practices used. Also these seals of approval must be linked to insurance, tax relief and eventually to the resale of the structure. The goal of these seals of approval would be to institutionalize the concept of "natural hazards safety" to be as widely accepted as auto safety standards.

Prevent Problems Before They Arise

Enforce seismic building code standards and fault setbacks for new construction. The most cost-effective time for implementing seismic standards is during the construction of the building. Local government must be diligent in enforcing these standards and must dedicate sufficient resources toward this end.

Restrict Uses on Public Lands

Permanently forbid construction on lands that are known to pose a natural hazard threat before they are transferred for development.

Trigger Other Building Code Upgrades?

As a result of the cost, some retrofit projects can trigger enforcement of ADA or fire upgrade standards. While both of these programs offer valuable benefits to society, the cost of implementation can double or triple the cost of earthquake mitigation, and thus dissuade building owners to undertake any action. I would not necessarily suggest removing these triggers for earthquake retrofit projects because individuals many disguise ordinary building upgrades as retrofit projects. However, some action needs to be taken to remove the disincentive to retrofit due to these triggers.

Link Mitigation to Federal Emergency Relief Aid

The federal government has a responsibility to help its citizens in time of crisis. If a disaster strikes, protecting or securing the safety of our nation’s citizens is one of its primary functions. However, individuals and local and state governments need to take responsibility for their respective actions and the federal government should not reward irresponsible behavior.

A single policy or program cannot address all of these factors. Therefore it is essential to develop a comprehensive package of incentives that address many aspects of mitigation. This package must create incentives and remove disincentives for cost-effective mitigation.

For More Information
The preceding was excerpted from an article published in the Western States Seismic Policy Councils newsletter. Reprinted with permission. To read the entire article, go to www.wsspc.org