Earthquake rules turn assets in liabilities

Strengthen or demolish? That’s the question many property owners will be forced to answer if a bill before Parliament passes into law.

Reviews by the Canterbury Earthquakes Royal Commission and the Ministry of Business, Innovation and Employment have triggered aftershocks that are now being felt throughout New Zealand.  Those reviews raised concerns about a lack of information identifying unsafe buildings and urged the Government to make sure that all buildings had at least one third of the strength of new buildings.

The result is the Building (Earthquake-prone Buildings) Amendment Bill which is currently working its way through Parliament. The bill is in the hands of a Select Committee which is scheduled to report to the House in July.

The key points in the bill include:

  1. An earthquake prone building is defined as one that does not meet at least 34% of the New Building Standard (NBS).
  2. The standard will apply to all commercial buildings, farm buildings, residential blocks of two or more stories and contain three or more units, motels, hotels and other accommodation providers (regardless of whether they are single story or not), fences, bridges, schools, churches, museums, and community facilities.
  3. A public register of earthquake-prone buildings will be created and maintained (by local councils).
  4. Local councils will be required to undertake seismic assessments within five years of the Bill coming into force, advise the property owner what is required to bring the building up to the new minimum standard, and when it must be done by.
  5. In general any required work will have to be carried out within 15 years of the assessment, or the building demolished. However, this does not necessarily mean property owners have the luxury of delaying the work. For example, the Whangarei District Council policy requires, “The buildings identified …falling below 33.33% of the new building standard [to] be upgraded within 20 years [5 + 15 years], or at the time of the next building consent whichever comes sooner.” Any building consent application, even if for a relatively inexpensive interior fit-out, would trigger what could be a very expensive and uneconomic earthquake upgrade.

An article in the NZ Herald (9 August 2014) estimated 193,000 buildings will be caught up in the law change with 15,000 to 25,000 likely to require strengthening. Some estimates put that cost at $10 billion (slightly less than the cost of repairing leaky homes).

Most of these affected buildings are in provincial and rural areas. The Herald quoted Wanganui, which has 11 per cent of the country’s at-risk buildings. Oamaru may lose its historic stone buildings. The historic town of Waimate may have to demolish 50 Edwardian buildings in and around the main street. In Dannevirke three-quarters of the town’s buildings would fail the standard and not be worth repairing.

Virtually every small town in Northland would be seriously affected – Hikurangi, Kawakawa, Kaikohe, Kaeo, Kaitaia – as would many buildings in Whangarei’s CBD.

The owners of aging commercial buildings are only now realising their investment may in fact be a very big liability. Most have not seen the tsunami on the horizon, but banks and insurance companies have.

Some banks are now requiring a one page Initial Evaluation Process report before lending on commercial property. One bank says, “Banks are looking for buildings to be 67% compliant ideally before lending on them, but we will look at 33-66% if there is a clear strategy and short time frame to have them upgraded so that they meet the 67% standard.”

A major insurer states, “Insurance cover will almost certainly change if…a building is earthquake prone…The minimum changes likely to apply are: The basis for settlement on the building will move to Indemnity Value…Seismic upgrade costs will be excluded from the cover.” In other words, cover will be limited to the value of the building at the time of the loss, which arguably could be very little.

Then there is also the reality that many corporate tenants are not leasing property with a low NBS rating. The Property Council of NZ states, “Whilst, under legislation, building owners are only required to strengthen if their buildings fall below the level of 34%…many tenants (including local government and central government tenants) are already demanding that their premises are 70%-100%.”

The bottom line is those owning earthquake prone buildings are unlikely to obtain finance, their insurance will be limited and expensive, and they will not be able to attract a tenant. Those effects are already being felt, even before the bill passes into law.

Comments are closed.