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thanks. let me rephrase the question the building codes says, "not allowed ... below grade except where an approved vapor retarder is applied between the wall and the furring strips or framing members. " What is "the approved vapor retarder" ? Is it just plastic membrane? a layer of concrete...

:) any cheaper solution?

replace: Does it mean to cut the frame too? Did you suggest to raise foundation? or just replace plywood and stucco by concrete?

Is it possible to make stucco waterproof enough to be below grade? if yes - how? if no - what options do I have? build a "retaining wall", replace plywood by metal and stucco by waterproof plaster? goal: there is an area between pathway and garage wall. I want to make it flat to install...