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It's good that you're being cautious about building right up against the retaining wall. Here are some things to consider:
The cracks in the wall should be evaluated by a structural engineer to ensure that they are not signs of a larger issue. Even if there is no noticeable movement, the cracks could be a warning sign that the wall is not as stable as it should be.
Without any engineering documentation for the wall, it's difficult to know exactly how strong it is and what kind of loads it can handle. It's possible that the wall was built to code and is perfectly fine, but without knowing for sure, it's better to err on the side of caution.
Building a layer of foam as a barrier between the retaining wall and the new construction is a good idea, as it can help prevent moisture from seeping into the new construction. Using pressure-treated lumber for the framing is also a good idea, as it is more resistant to moisture and rot.
In summary, before building right up against the retaining wall, it's important to have a structural engineer evaluate the wall to ensure that it is stable and able to handle the new construction. Using a layer of foam as a moisture barrier and pressure-treated lumber for the framing is also recommended.