Building Engineer Blog

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.

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

The acronym “ALTA” stands for American Land Title Association. Specifications of this type of Survey include (but are not limited to) determining improvements, location of property lines, utilities, identifying all easements and other conditions affecting the property. ALTA surveys are very comprehensive surveys and can typically cost thousands of dollars and can take several weeks to complete. All ALTA Land Survey must meet the “Minimum Standard Detail Requirements for ALTA/ACSM Land Title Surveys” as adopted by the American Land Title Association, the American Congress on Surveying and Mapping, and the National Society of Professional Surveyors. The Alta Survey is most often performed on commercial properties.

Real Estate, Real Estate Due Diligence, Structural Engineering

When investing in commercial buildings, real estate investors are need a high quality commercial building inspection, often called a Property Condition Assessments.  

When asked to do a Commercial Building Inspection, I start by trying to understand the client’s goals.  Are they ordering the report for a lender?   Do they want a 100% detailed inspection or a walk through?   Has the seller made any significant disclosures?  Are there other stakeholders such as equity sources or partner who need to understand the condition of the building?  Once I understand the goals I propose the appropriate level of diligences, which can range from a walk-through inspection by a senior building inspector to a team of engineers and specialist digging into every aspect of the building.

Either way, the Property Condition Assessment Report which includes a discussion of the following building systems:

-          Structure;

-          Building Envelope;

-     Roof;

-         HVAC Equipment

-          Mechanical, Electrical, and Plumbing;

-         Paving, Drainage, Landscaping;

-          Fire Suppression and Security Systems;

-          Elevators;

-          ADA Compliance.

A PCA report typically includes two important tables: an Immediate Repairs Table; and a Replacement Reserves Table.   The Immediate Repairs Table is a schedule of all failing or worn out systems requiring attention in the next 90 days.   The Replacement Reserve table will typically estimate the building’s capital replacement schedule for the next twelve years.  

When I dispatch a team of engineers and building systems specialists, I call the report a Property Condition Evaluation.  These reports typically range between $5,000 and $25,000 and are appropriate for large complex assets.   The most common specialist to add is that of a structural engineer.  The structural engineer will produce a structural report or a Probable Maximum Loss Report, when in seismic zone 3 or 4.  

Other specialists that add great value are an HVAC specialist, an elevator specialist and a roof specialist.  The specialist typically produces reports that are ultimately included in the appendix of the master PCE report. 

The specialist does thing that are beyond the scope of our building inspectors.  For example, the HVAC specialist will turn on the air conditioning system in the dead of winter.  The specialist opens up the systems being inspected and collects parametric data.  The result of the more detailed inspection is a very detailed report with specialty reports in the appendices.  Partner Engineering’s project manager and field inspector is almost always a registered engineer or very senior building inspector. 

Our Property Condition Evaluations save the client significant money in most engagements.  Often clients are able to negotiate price reduction or other consideration that is 10 times our fee.  Our work typically pays for itself!

Commercial Building Inspection, Real Estate, Real Estate Due Diligence, Structural Engineering Commercial Building Inspection, PCA, PML, Probable Maximum Loss, Property Condition Assessment, Property Condition Report