Glendale (PDF) - Hazard Mitigation Web Portal - State of California

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Natural Hazards Mitigation PlanCity of Glendale, CaliforniaAppendix C – Economic Analysisdisclosure laws can be developed which require sellers of real property to discloseknown defects and deficiencies in the property, including earthquake weaknesses andhazards to prospective purchasers. Correcting deficiencies can be expensive and timeconsuming, but their existence can prevent the sale of the building. Conditions of a saleregarding the deficiencies and the price of the building can be negotiated between abuyer and seller.How Can an Economic Analysis be Conducted?Benefit/cost analysis and cost-effectiveness analysis are important tools in evaluating whetheror not to implement a mitigation activity. A framework for evaluating alternative mitigationactivities is outlined below:1. Identify the Alternatives: Alternatives for reducing risk from natural hazards caninclude structural projects to enhance disaster resistance, education and outreach, andacquisition or demolition of exposed properties, among others. Different mitigationprojects can assist in minimizing the risk to natural hazards, but do so at varyingeconomic costs.2. Calculate the Costs and Benefits: Choosing economic criteria is essential tosystematically calculate the costs and benefits of mitigation projects and select the mostappropriate alternative. Potential economic criteria to evaluate alternatives include:• Determine the Project Cost. This may include initial project development costs,and repair and operating costs of maintaining projects over time.• Estimate the Benefits. Projecting the benefits, or cash flow resulting from aproject can be difficult. Expected future returns from the mitigation effort dependon the correct specification of the risk and the effectiveness of the project, whichmay not be well known. Expected future costs depend on the physical durabilityand potential economic obsolescence of the investment. This is difficult to project.These considerations will also provide guidance in selecting an appropriate salvagevalue. Future tax structures and rates must be projected. Financing alternatives,such as retained earnings, bond and stock issues, and commercial loans, must beresearched.• Consider Costs and Benefits to Society and the Environment. These are noteasily measured, but can be assessed through a variety of economic tools includingexistence value or contingent value theories. These theories provide quantitativedata on the value people attribute to physical or social environments. Even withouthard data, however, impacts of structural projects to the physical environment or tosociety should be considered when implementing mitigation projects.• Determine the Correct Discount Rate. Determination of the discount rate canrefer only to the risk-free cost of capital, but it may also include the decision maker’stime preference and also a risk premium. Inflation should also be considered.3. Analyze and Rank the Alternatives: Once costs and benefits have been quantified,economic analysis tools can be used to rank the alternatives. Two methods fordetermining the best alternative given varying costs and benefits include netpresent value and internal rate of return.2006 PAGE C - 3
Natural Hazards Mitigation PlanCity of Glendale, CaliforniaAppendix C – Economic Analysis• Net Present Value. Net present value is the value of the expected future return onan investment minus the value of expected future cost expressed in today’s dollars.If the net present value is greater than the project’s costs, the project may bedeemed feasible for implementation.• Internal Rate of Return. Using the internal rate of return method to evaluatemitigation projects provides the interest rate equivalent to the dollar returnsexpected from the project. Once the rate has been calculated, it can be compared torates earned by investing in alternative projects. Projects may be feasible toimplement when the internal rate of return is greater than the total costs of theproject.Once the mitigation projects are ranked on the basis of economic criteria, decision-makers canconsider other factors, such as risk, project effectiveness, and economic, environmental, andsocial returns in choosing the appropriate project for implementation.How are the Benefits of Mitigation Calculated?Economic Returns of Natural Hazard MitigationThe estimation of economic returns, which accrue to a building or landowner as a result ofnatural hazard mitigation, is difficult. Owners evaluating the economic feasibility of mitigationshould consider reductions in physical damages and financial losses. A partial list follows:• Building damages avoided• Content damages avoided• Inventory damages avoided• Rental income losses avoided• Relocation and disruption expenses avoided• Proprietor’s income losses avoidedThese parameters can be estimated using observed prices, costs, and engineering data. Thedifficult part is to correctly determine the effectiveness of the hazard mitigation project and theresulting reduction in damages and losses. Equally as difficult is assessing the probability thatan event will occur. The damages and losses should only include those that will be borne by theowner. The salvage value of the investment can be important in determining economicfeasibility. Salvage value becomes more important as the time horizon of the owner declines.This is important because most businesses depreciate assets over a period of time.Additional Costs from Natural HazardsProperty owners should also assess changes in a broader set of factors that can change as aresult of a large natural disaster. These are usually termed “indirect” effects, but they can havea very direct effect on the economic value of the owner’s building or land. They can be positiveor negative, and include changes in the following:• Commodity and resource prices• Availability of resource supplies• Commodity and resource demand changes• Building and land values• Capital availability and interest rates• Availability of labor• Economic structure2006 PAGE C - 4
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City CouncilDave Weaver, MayorRafi
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Natural Hazards Mitigation PlanCity
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Table 4-2: STAPLEE Ranking of Actio
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NOTES:This map is intended for gene
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City of GlendaleUpdateHazard Mitiga
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Similar to Safety ElementIncludesEa
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HospitalsPartnershipsWithin City an
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Impact on CityMost significant area
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