Case 00-2: Hazardous Building in a Low Seismic Region

The following is a summary of visitor responses and comments on the case study presented on the Web site between June and October 2000. It is intended to be a factual portrayal of trends and individual comments without editorial input from EERI staff.

Review The Situation:

Freddie Finance is the CEO of WeBildEm, a real estate development company located in the central US. This company owns several properties in the town of Midwestville, a growing tourist center. The company is near completion of the design phase of a project to renovate an old, vacant industrial and warehouse complex that it owns into a large historic museum and public market near the heart of the city redevelopment area. The project, which features some world-class tenants and involves an internationally renowned design team, will greatly increase the WeBildEm's revenues and save it from some recent years of financial difficulty.

About this same time, an unrelated due diligence study of one of the company's other buildings exposed some serious seismic concerns. The 6-story office building is a 1940s vintage reinforced concrete moment frame structure. The engineering study concluded that the building lacks both the strength and ductility to resist even a moderate sized earthquake. Partial collapse of the structure was considered a realistic potential during a major earthquake. Since the deficiencies were global in nature, nothing short of a full upgrade of the lateral system would mitigate the hazard. To make matters worse, the assessment was leaked to the local press.

WeBildEm quickly contracted for a second, independent engineering study, which concurred with the initial assessment. However, both engineering evaluations noted that in this part of the US, major earthquakes are expected to occur very infrequently - on the order of every 2500 years.

It would be impossible for WeBildEm to finance an upgrade of the office building and complete the museum project. In addition, both the tenants and the design team have said that they would not continue with the museum project if the already tight budget were squeezed any further.

There is no legal requirement for strengthening the office building, but many tenants and several civic leaders have expressed their concern about the seismic risks associated with the building.

How should Mr. Finance proceed?

Response Summary:

The responses to this dilemma were quite evenly mixed. Some recommended proceeding with the museum project, while others opted to put the museum on hold in order to mitigate the hazard associated with the office building.

Those who recommended proceeding with the museum did so because of the low level of seismic hazard and because of a general belief that upgrade of the office building is likely be feasible only in the context of a financially healthy company. The level of risk is reasonable to justify the delay in rehabilitation that is required to raise the funds and keep the company solvent.

Others - slightly fewer in number, but no less emphatic - felt that WeBildEm is obligated to first reduce the potential risks to life safety associated with the office building, and only then proceed with the museum. Their responsibility for the safety of their tenants is placed before their profitability.

Recommended Actions:

Readers were asked to rate several possible actions - considering the interests of all stakeholders - based on the following scale. The actions are listed in no particular order, and the rating for each action is the average of the ratings gathered.

5 — Strongly Agree 4 — Agree 3 — Neutral 2 — Disagree 1 — Strongly Disagree

  1. Put the museum renovation project on hold to finance an upgrade of the office building, even though this would likely be devastating to the company's future. Mitigating the risk to life-safety should be the priority, regardless of the frequency of major earthquakes. Average Rating: 2.4 (min: 1,max: 5)
  2. Proceed with the museum project, but vacate the office building until retrofit funds are available, about 10 years given current income projections without the leased space. The resulting lost lease income would hurt the bottom line, but the hazard would be mitigated. Average Rating: 2.9 (min: 1,max: 5)
  3. Proceed with the museum project, keep the office building occupied in its current state, and wait for retrofit funds to be available, reduced to about 7 years with the current lease income. The chances of an earthquake are remote enough to justify the risk. Average Rating: 3.6 (min: 2,max: 5)
  4. Proceed with the museum project and use the revenues from the museum project to fund a staged retrofit of the office building over a period of several years (e.g. partial upgrade in 3 years, more work in 6 years, and complete in 9 years). The office building could be only partially occupied during this period. The retrofit, because of the staging, would have a greater overall cost, and as discussed above, a partial upgrade may not significantly improve the building, but at least some work is being done. Average Rating: 3.3 (min: 1,max: 5)
  5. Proceed with the museum project and do nothing to the office building until the law is changed to require retrofit for hazardous buildings. Mr. Finance does not want to put himself in a competitive disadvantage by investing in a voluntary upgrade while other building owners continue to operate potentially hazardous buildings. (Note that other financial incentives, including lease rates and insurance costs, could also effect his decision to upgrade). Average Rating: 2.4 (min: 1,max: 4)

Readers were asked what additional information would have put them in a better position to pick an alternative.

Based on the readers' comments, the following is a listing (in no particular order) of relevant information that would have assisted in making a better decision:

  1. Potential for retrofit laws to be enacted in the near future.
  2. More information on the building site, seismicity, and geologic conditions.
  3. How building compares to other similar buildings in terms of seismic risk.
  4. Whether or not any prior engineering evaluations of the building have been made.

Readers were then asked to offer a suggested course of action for the Mr. Finance. The following is a brief summary of the suggestions. As is the nature of ethical dilemmas, there is no right or wrong answer, and many courses of action could be considered equally valid depending on individual values and/or interpretation of events.

As indicated by the distribution of ratings shown above, the opinions of the respondents were wide spread on this issue.

A small majority felt that it was appropriate to continue with the museum project and delay rehabilitation of the office building until the funds were available. This course of action reflects a general belief that, given the level of seismic hazard in the region, the risks associated with the office building are acceptable in the near term. Also noted was the fact that nothing be would gained if WeBildEm went out of business; therefore, the projected revenues from the museum are important.

The other significant group responded that WeBildEm should place the highest priority on upgrading the office building, thereby putting the museum on hold. Despite the level of seismic hazard, the life safety concerns ought to take precedence.

Some individuals also noted that WeBildEm should be very forthright in notifying the building occupants of the hazard, regardless of their upgrade plans.

Comments on Questions for Further Thought:

Finally, readers were asked to respond to the following two questions:

Would your recommendations be different if the building were in a region of high seismicity (for example in California where the chance of a damaging earthquake is over 10 times greater)? If so, how?

Again, the responses were mixed. A majority agreed that, yes, the recommendations may be different. Often this was due to a belief that in areas of high seismicity there may be legal requirements for upgrade. A smaller group felt that their recommendation would be the same.

Is there an acceptable level of risk resulting from extremely hazardous buildings in regions of low to moderate seismicity?

Most agreed that there is an acceptable level of risk, while some did not. In the context of this acceptable risk, the notion of phased upgrades makes sense. This would spread out the financial burden, while not resulting in unreasonable levels of hazard in the short term.