Building Engineer Blog

How do financial institutions manage the seismic risk of their portfolios?

The short answer is, many of them do not.  Many institutions have no formal seismic risk policy to screen out higher-risk properties, and even within those that do have a policy, Seismic Risk Assessments can be a source of confusion.

“Probable Maximum Loss” reports, also called “Seismic Risk Assessments” are an often misunderstood but very important tool in the underwriting toolkit for structured finance.  These risk assessments rate buildings for seismic risk, the goal of which is to protect your portfolio and downstream investors from a double helping of seismic risk.   The PML Report cannot completely eliminate risk from a seismic event, but the PML will screen out buildings that are at greatest risk for damage during an earthquake.   Note: lenders that don’t require PMLs might find that their portfolio suffers from adverse selection; essentially getting a double helping of seismic risk.

To use the Probable Maximum Loss Report well a lender needs consistency.   If you are going to measure anything, you want to do it by the same method every time.   Seems like common sense, but the way the seismic risk assessment standards are written (ASTM E 2026-07 and E 2557-07) allows for numerous different types of assessments, scopes of work, and ways to report the PML value.  So, lenders really need to play an active role in defining what they want in their seismic risk policy. 

I recently participated in a webinar panel on how lenders can better understand and use PMLs, and structure a seismic risk policy.  It is available to view on demand until January 31, click here to sign up.

Joe Derhake Uncategorized PML Report, PML webinar, Probable Maximum Loss, probable maximum loss report, Probable Maximum Loss webinar, Seismic Risk Assessment, Seismic risk policy, Seismic Risk webinar

On May 31, FHA and Fannie Mae announced the launch of Green Refinance Plus, a joint program to provide funding for energy and water efficiency upgrades as well as other property renovations.  US Housing and Urban Development’s (HUD) Federal Housing Administration (FHA) has teamed up with Fannie Mae to share the risk of loans made in the Green Refinance Plus, an improvement of the Fannie Mae/FHA Risk-Share program.

Under the new program, borrowers will be required a “Green Physical Needs Assessment” to identify needed renovations to the property, energy efficiency measures (EEMs) and water-efficiency improvements.  The Green Physical Needs Assessment or “Green PNA” essentially combines a standard Physical Needs Assessment and an Energy Audit.

Green Physical Needs Assessment Scope of Work and Qualified Provider

The Green PNA scope of work includes three main components: 1) a traditional PNA report that will also identify energy and water efficiency measures; 2) an Energy Audit that will analyze the cost and financial payback of recommended energy and water efficiency improvements and alternatives, and benchmark energy and water costs over the long term using ENERGY STAR Portfolio Manager;  and 3) an Integrated Pest Management Plan Inspection including an inspection of the current pest condition at the property and an evaluation of the current pest management plan.

The Green PNA for the refinance program must be completed by a “Qualified Provider,” which is someone who is either: certified to complete energy audits by RESNET or BPI (or their training providers); a Certified Energy Manager (CEM) or state equivalent; a registered architect; a registered professional engineer; a RESNET certified Home Energy Rater; or a BPI Certified Building Analyst.  There are additional qualifications for the provider, including the individual provider’s experience, quality of reports and timeliness.

More information on the Green PNA scope and qualified provider requirements can be found here.

Questions?

Partner Engineering and Science, Inc. specializes in Energy Audits, standard PNAs and Green PNAs.  Feel free to give us a call with any questions.  800-419-4923.

Joe Derhake Uncategorized Fannie Green Physical Needs Assessment, Fannie Green PNA, Fannie Mae Green Physical Needs Assessment, Fannie Mae Green PNA, FHA/Fannie Mae Green Refinance, Green Physical Needs Assessment, Green Physical Needs Assessment Qualified Provider, Green Physical Needs Assessment Scope of Work, Green PNA, Green PNA Qualified Provider, Green PNA scope of work, Green Refinance Plus, Green Refinance Plus Qualified Provider, HUD Green Physical Needs Assessment, HUD Green PNA

Last week San Francisco passed a landmark energy Ordinance requiring owners of commercial buildings to perform energy benchmarking.   The San Francisco Existing Commercial Buildings Energy Performance Ordinance requires annual bench marking and energy audits every five years. 

Annual energy benchmarking is defined as follows:

(a)   Annual Energy Benchmark Summary Reporting. The owner of every non-residential building in the City shall annually file with the Department of the Environment an Annual Energy Benchmark Summary report (”AEBS”) for each covered building using ENERGY STAR® Portfolio Manager and according to the schedule set forth in Section 2004 of this Chapter. The AEBS shall be based on assessment in Portfolio Manager of the entire non-residential building and related facilities, and must use 12 continuous months of data ending no earlier than two months prior to submittal to the Department of the Environment.

Compliance with the energy benchmarking is staggered based on the size of the building, but the first group of buildings, non-residential buildings over 50,000 s.f., is due in April of 2011.  

The energy audits requirement is also staggered over 5 years, as the population of qualifying energy engineers could not otherwise meet the demand.    The energy audits are required to be done to ASHRAE Level II Standards.   The American Society of Heating, Refrigerating, and Air-conditioning Engineers Inc. (ASHRAE) maintains well established energy audit standards.  

 Energy Efficiency Auditor Qualifications

The San Francisco Existing Commercial Buildings Energy Performance Ordinance provides clear criteria for the qualifications of the energy engineer / energy auditor:

(c) Energy Efficiency Auditor Qualifications. An energy professional performing or supervising energy efficiency audits must hold one of the following qualifications:

(1) Licensed Professional Engineer and one of the following:

(A) At least 2 years experience performing energy efficiency audits or commissioning of existing buildings; or

(B) ASHRAE Commissioning Process Management Professional Certification; or

(C) Similar qualifications in energy efficiency analysis or commissioning.

(2) Association of Energy Engineers Certified Energy Manager (CEM);

(3) At least 10 years experience as a building operating engineer, or at least 5 years experience as a chief operating engineer and one of the following:

(A) BOC International Building Operator Certification; or

(B) International Union of Operating Engineers Certified Energy Specialist; or

(4) Equivalent professional qualifications to manage, maintain, or evaluate systems, as well as specialized training in energy efficiency audits and maintenance of systems, as determined by the Director.

By requiring serious credentials the San Francisco Existing Commercial Buildings Energy Performance Ordinance will ultimately make the data generated more useful to building owners.

The benchmarking piece of the law will dovetail nicely with California law AB 1103, which requires building owners to disclose their Energy Star Ratings at during sale, lease, or financing transactions.  

admin Energy Audit Commercial Building Energy Audit, Energy Disclosure, San Francisco Energy Disclosure, San Francisco Energy Ordinance, San Francisco Existing Commercial Buildings Energy Performance Ordinance

The draft ASTM E2797-2011 BEPA (Building Energy Performance Assessment) Standard will provide another method to assess and disclose the energy efficiency of commercial buildings.  The standard is expected to be published in 2011, though no date has been specified.

BEPA was created in an effort to standardize the process of assessing the energy efficiency of a building for the purposes of pre-transaction disclosure.  Building purchasers will want to know the building’s energy consumption, and lenders will want to understand the building’s operating costs. 

BEPAs were designed to be conducted in concurrence with a Phase I ESA or PCA; however, BEPA buyers need to be aware that the personnel used for the site inspection during a Phase I or PCA may not be trained appropriately to conduct the BEPA.  The inspector for BEPA should be a mechanical or other engineer, Certified Energy Manager (CEM), LEED AP or other professional with training in building and energy systems.

More states are requiring energy efficiency disclosure of commercial buildings.  As this trend continues, more building owners, purchasers and commercial real estate professionals are recognizing the value of energy assessments not just because of these regulatory requirements, but because energy efficiency initiatives really work.  In addition to greater marketability of a building, capital investments into energy efficient system upgrades will yield substantial return on investment.

According to Tony Liou, President of Partner Energy, the EPA’s Energy Star program is currently the most commonly used energy disclosure and benchmarking tool; however, Partner Energy structures each assessment according to the client’s specifications and the most appropriate method, whether the Energy Star program, ASHRAE audits, or the upcoming BEPA standard.

Partner Energy specializes in an array of energy services including audits, modeling and benchmarking.

Joe Derhake Commercial Building Inspection, Energy Audit, Real Estate, Real Estate Due Diligence ASTM 2797, ASTM BEPA, ASTM E2797, BEPA, Building Energy Performance Assessment, Energy Audit, Energy benchmarking, Energy Disclosure, energy efficiency

The commercial mortgaged-backed security (CMBS) industry has been reborn in 2010.  CMBS underwriters call their new underwriting paradigm CMBS 2.0.   Providers of third party reports such as Phase I Environmental Site Assessments, Property Condition Assessments and Probable Maximum Loss reports ask: What does CMBS 2.0 mean to our trade?   

The Phase I Environmental Site Assessment and the Property Condition Assessment are rather standardized and in my opinion are being provided to CMBS lenders with great reliability.   The Probable Maximum Loss report needs standardizing.   In 2007, ASTM published two new standards for Probable Maximum Loss Reports:  ASTM E2026-07 Standard Guide for Seismic Risk Assessment of Buildings, and ASTM E2557 Standard Practice for Probable Maximum Loss (PML) Evaluations for Earthquake Due-Diligence Assessments.

These new ASTM Standards improve the process, but are too flexible.  For example, the standards do NOT specify how an engineer should calculate a PML and some engineers perform calculations that are out of the mainstream or worse, do no math at all-they just call it based on their judgment.  Of course my colleagues may be very good engineers, but what the industry needs is an objective measurement of seismic risk.   The process should be transparent and peer reviewable.  

Objective reliable Probable Maximum Loss Reports are easily achievable; we just need some help from our clients.  Yes, the clients must do their part.   If clients require the following we will be more than half the way there:

1. Only order reports from firms with registered engineers on staff;
2. Require the engineer to show his/her math;
3. Require that the engineer call the Scenario Expected Limit as the PML, but also report the Scenario Upper Limit.

I have participated in writing the Probable Maximum Loss Scope of Work for several lenders and my rational for my recommendations is presented more thoroughly in my RMA Journal article titled Managing Seismic.

Happy Holidays,
Joe Derhake, PE

admin Uncategorized ASTM E2026, ASTM E2557-2007, CMBS, PML, PML Report, Probable Maximum Loss, Probable Maximum Loss CMBS, probable maximum loss report, Scenario Expected Loss, Scenario Upper Loss, SEL, SUL

Adding an Energy Audit or Energy Benchmarking to a Property Condition Assessment (PCA) can put dollars in your pocket.  A PCA gives you an indication of the current and future costs of building maintenance, but you could be missing out on many cost-savings measures. 

Energy Benchmarking is a cost-effective first step to understanding and reducing your energy consumption and carbon footprint.  Benchmarking studies a building’s current energy usage and helps determine achievable and cost-effective energy reduction goals. 

An Energy Audit is a comprehensive look at how a building consumes energy along with recommendations to reduce energy use (via no/low cost measures or capital intensive measures), costs to implement, projected cost savings and payback period.  While an Energy Audit is a more involved process and can vary in the level of detail (ASHRAE Levels 1, 2 and 3), the potential returns on investment are significant.

A building purchaser would be interested to know, for example, if a lighting system upgrade could result in a 34% internal rate of return.  Well, that’s just what one of Partner Energy’s audits uncovered.  A combination of new high-efficiency lighting and motion sensors (at a total cost of approximately $44,000) resulted in an annual energy cost savings of $14,700 and a relatively short payback period (less than 3 years).  At an 8% cap rate, the building value increased by $183,000 (over 4 times the installation cost) - certainly a sound investment!  And that did not account for potential rent increases, increases in absorption and decreases in vacancy for Green Labeled buildings.

By reducing operating expenses and increasing building value, an Energy Audit and its recommended energy efficiency measures can help building owners and purchasers achieve their energy efficiency and capital investment goals.

Joe Derhake Commercial Building Inspection, Energy Audit, Real Estate, Real Estate Due Diligence, Structural Engineering

With the latest SOP revisions taking effect on October 1^st, 2010 there are certain elements in regards to Environmental Policies and Procedures found in SOP 5010 5 (C) (pages 199 - 206 & 310 - 317) that lenders should be aware of.

An important fact for lenders to understand is that the Reliance Letter has had a revision and as of October 1, 2010 the Reliance Letter from SOP 5010 5 (B) will no longer be accepted.   It is critical for lenders to make sure their environmental firm know of the new Reliance Letter and will sign it.  We strongly suggest that lenders make sure that their Environmental Professional understands this prior to engaging them to do the work, and understand that the Reliance Letter cannot be modified in any way.

Overall, the Environmental Requirement changes in this latest SOP were minimal and below we provide the actual revisions to the Environmental  Policies for your review.

• When you are making a loan for less than $150,000.00 and the Environmental Questionnaire comes back showing further investigation is required, you may now have a Records Search with Risk Assessment (RSRA) performed instead of having to go to a Transaction Screen Report. SBA believed that this was more with the natural progression of reporting and therefore made this change.
• When reviewing the NAICS Codes of Environmentally Sensitive Industries the code 8123 LAUNDRY & DRY CLEANING SERVICES it now will state if dry cleaning operations have ever existed on-site. Prior to the revision it stated if dry cleaning operations on site.
• In Section f) Mitigating Factors that SBA will rely upon to disburse before completion of remediation or monitoring, for section f) titled Escrow Account the new SOP clarifies two issues. The first being that the money put into the escrow account can’t come from funds from the SBA loan itself. The second clarification answers the question if the money in the escrow account can be used for the actual remediation itself or if it needs to stay in the escrow account until the remediation is completed. The answer is that yes, it can and should be used for the remediation costs.
• In Section g) Groundwater Contamination Originating from Another Site, the revision to the SOP eliminates the sentence, “and lender can demonstrate that the contamination has not caused significant damage to the collateral value and marketability of the Property”. They made this change understanding the lender really couldn’t demonstrate or comply with this requirement.
• The Reliance Letter in appendix 3 has been modified by adding the words “as it impacts the property” at the end of the last sentence in regards to a Phase II Environmental Site Assessment.
• Special Use Facilities (Section H), when a Phase II is required for a dry cleaners in operation for more than five years the Phase II must be conducted by an independent Environmental Professional who holds a current Professional Engineer’s or Professional Geologist’s license and has the equivalent of three years of full-time relevant experience.
• Appendix 5: Requirements Pertaining to Gas Station Loans, Phase I’s no longer need to be conducted by an Environmental Professional who holds a current Professional Engineer’s or Professional Geologist’s license and has the equivalent of three years of full-time relevant experience. It can now be conducted by an Environmental Professional meeting the requirements as outlined in Appendix 2: Definitions.
• Appendix 5: Requirements Pertaining to Gas Station Loans, Phase II’s must be conducted by an Environmental Professional who holds a current Professional Engineer’s or Professional Geologist’s license and has the equivalent of three years of full-time relevant experience.

Partner Engineering and Science has a SBA Division dedicated to assisting lenders in understanding SBA’s Environmental Requirements and providing Environmental Reports nationwide for 7a and 504 loans.  We are truly the SBA Experts that lenders, CDC’s, and attorneys nationwide have come to depend on!

We’re here for you.  Give us a call and let us become your Partner too!

The changes found in SBA’s SOP 5010 5 (C) can be viewed by going to: http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sops_50105c.pdf

For further clarification or to request free laminated flowcharts of 5010 5 (C) please contact Gary Reynolds at greynolds@partnesi.com or by calling 800-419-4923.

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Engineers perform Probable Maximum Loss Reports (or Seismic Damageability Reports) for real estate investors, lenders, and insurance companies. The consumers of Probable Maximum Loss Reports have many different needs and there is considerable variance in methodology between providers-sometimes for client driven reasons and sometimes because of the engineer. 

ASTM E2026 Standard Guide for Estimation of Building Damageability in Earthquakes ,  is a standard that tries to meet the needs of all stakeholders. The result is that the standard is often not very prescriptive. The very flexible ASTM for PMLs allows for a plethora of different types of PML Reports and is silent on the issue of the formula for calculating the PML.  

The most significant element of the ASTM E2026 Standard is a defined set of vocabulary.   Significant elements are as follows:

First, the term Probable Maximum Loss is defined as “a term used historically to characterize building damageability in earthquakes. It has had a number of significantly different explicit and implicit definitions. It is recommended that the term not be used in the future, and that the terms probable loss (PL) and scenario loss (SL), whose definitions are precise, be used to characterize the earthquake damageability of buildings and groups of buildings.”

Second, instead of simply stating the “Probable Maximum Loss Number” for a report, the ASTM Standard recommends providing multiple numbers.  An engineer’s prediction is really not a single number (or damage ration); rather, we develop a curve of probabilities. Providing lenders a probability curve does not really work for the financial industry. Instead we have historically expressed to lenders a number associated with a given scenario. The ASTM E2026 Standard defines two important numbers on the curve:

Scenario Expected Loss (SEL)- the expected value loss in the specified ground motion of the scenario selected. Since the damage probability distribution usually is skewed, rather than symmetrical, it should not be inferred that the probability of exceeding the SEL is 50%; it can be higher or lower than this amount.

Scenario Upper Loss (SUL)-the scenario loss that has a 10% percent probability of exceedance due to the specified ground motion of the scenario considered.

The ASTM E2026 Standard also provides different levels of investigation.   The four levels of inspection defined are:

Level 0 PML -  Screening Level of Assessment

Level 1 PML -  Drawing review and Site Visit

Level 2 PML - Structural Calculations

Level 3 PML - Full Engineering Review

The ASTM E2026 Standard goes a long way to improving the consistency of the practice of Probable Maximum Loss Reports (a.k.a. Seismic Damageability Assessments), but the ASTM’s committee need to accommodate all stakeholders produced, in my opinion, an overly flexible standard.   I recommend that a lender seeking to use the PML product as a consistent underwriting tool should also consider applying the following four recommendations:

• 1) Use Theil Zsutty as a method of calculation for the PML;
• 2) Show the math on the calculations;
• 3) Work should be done under the responsible charge of a registered engineer;
• 4) Follow ASTM E2026-2007 and ASTM E2557-2007;
• 5) Do a Level 1 Inspection-in other words, require a site visit.

admin Uncategorized ASTM E2026, ASTM E2557-2007, PML, PML Report, Probable Maximum Loss, probable maximum loss report, Scenario Expected Loss, Scenario Upper Loss, Seismic Damageability Reports, SEL, Standard Guide for Estimation of Building Damageability, Structural engineer, SUL, Theil Zsutty

Environmental due diligence consults should not just perform  Phase I Environmental Site Assessments, they should focus on managing their client’s environmental liability. However, in order to do so, it is imperative that clients ask for the help.

Environmental consultants can perform better if they are given the opportunity to meet with the client and understand their business.  It is also a necessity to understand the client’s risk tolerance.

 All clients do not have the same risk tolerance - and they shouldn’t. For example, a child day care chain should obviously be more risk adverse than an owner of a warehouse. Consultants must also keep in mind that some investors and lenders are conservative when it comes to environmental issues. These nuances need to be expressed. 

 To be a good engineer, the client’s business must first be understand by the engineer.

Partner Engineering and Science offers clients free environmental liability management  consultations where the client’s business, their objectives, and their risk tolerance are all discussed in great detail.

Writing a sound environmental risk policy is not too difficult. Partner will give their clients multiple free samples of what lender’s policies should look like, so that they can pick the policy that fits their bank. If there are missing elements within the policy that are important to the client’s bank, they are easy to insert.  

The bottom line is, if clients are spending a lot of money on environmental due diligence, they should take a more holistic look at their environmental policy.

Joe Derhake Real Estate, Real Estate Due Diligence Bank Environmental Policy, environmental liability management, Environmental Policy, Lender's Environmental Policy, Manage Bank's Environmental Liability, Manage Environmental Liability

Real estate investors routinely order a Property Condition Report in order to understand the condition of the asset that they are purchasing.    The Property Condition Report should illuminate any immediate repairs or deferred maintenance issues and should provide a schedule of capital replacement reserves.   But the Property Condition Report only addresses what is broken and what will need to be replaced.   What about the opportunity to save money?

An Energy Audit in conjunction with a Property Condition Report will illuminate how a building should be performing.    Often the Energy Audit will discover multiple aspects of a buildings energy management program that are suboptimal and can easily be corrected.     Energy Audit will also give the user a list of potential energy efficiency investments and will rank these investments in terms of payback period—often several opportunities with sub-3-year payback periods are indentified.

The Energy Audit and Property Condition Report go well together as they are addressing the same systems.   The Property Condition Report may schedule the replacement of a roof mounted HVAC system in year 8 of the replacement reserve as that is the end of its useful life; however, the Energy Audit may make a case for not using an old inefficient system until it fails; rather, the building owner may receive an positive return by replacing it sooner.

My company, Partner Engineering Science, and our sister company Partner Energy routinely provide these services in tandem.

Joe Derhake Energy Audit, Real Estate Due Diligence , Energy Audit, PCR Energy, Property Condition Assessment, Property Condition Report