Author Archives: Igrossman

Going Beyond ASTM – Property Condition Assessments

The satisfactory completion of real estate transactions relies on the satisfactory completion of due diligence. The broad definition of due diligence includes a number of non-physical issues, such as leases and contracts, property title issues, taxes and assessments, approvals and entitlements, historic and open space provisions and personal property.

The physical issues related to a property are evaluated using several defined investigative procedures. These include Property Condition Assessments (PCA), Environmental Site Assessments (ESA), ALTA property surveyszoning studiesseismic risk assessments and energy studies, which are now required in many states and cities as part of a real estate transaction.

There are two documents developed by ASTM International (formerly American Society for Testing and Materials) which contain the generally accepted standards in the real estate industry for PCAs (ASTM E-2018) and ESAs (ASTM E-1527). These are in general use in the industry and accepted by both investors and lenders.

Going Beyond the Standard Scope
However, there are some investors who have performance requirements that go beyond the ASTM documents. These could be pension funds, pension fund advisors, insurance companies and real estate investment trusts, who deal with large transactions and carry greater risk because their clients rely directly on the investments they make. They may have risk managers or departments whose responsibility is be sure the investments, both real estate and other types, fit the corporate risk profile.

I have spent much of my career with both sides of the table: consultants who perform the PCAs and ESAs, and clients who advise or are equity investors. During this time, I have come across many requests for additional items that expanded the PCA beyond the standard scope.

This will be the subject of two blogs: in this blog I will discuss when and how clients go beyond the standard scope for a PCA, and another blog will cover the Phase I ESA. It is important to remember that a customized scope of work can increase the cost and delivery time of a report, and should be discussed by client and consultant before their contract is finalized.

ASTM E-2018 – the standard for Property Condition Assessments
ASTM E-2018 is the Standard Guide for baseline Property Condition Assessments. The guide has a standard scope of work, but also recognizes that “…there are varying levels of property condition assessment and due diligence that can be exercised that are both more and less comprehensive than this guide, and that may be appropriate to meet the objectives of the user”. To accommodate this, ASTM E-2018 includes additional sections describing out-of-scope due diligence services that can be performed at the option of the client: Annex A1 and Section 11.

Annex A1: “Specific Property Types”
Annex A1 lists special items that are not included in the baseline, but can be selected to supplement the PCA process. Some examples my clients have requested throughout the years include:

1. Parking Counts (Annex A1 gives two options: base the count on drawings or actual field counts).
2. Multifamily Units Count (Again, the annex gives two options: count based on drawings, actual field counts).
3. Calculations of Building areas (Annex 1 gives options for gross and net usable area; measurement from drawings and field measurement. Low rise buildings had sometimes been field measured).
4. Investigation of Third Party Service companies records (While this may be helpful I have not often seen it requested).

Section 11: “Out of Scope Considerations”
Section 11 of the ASTM E-2018 lists activities and additional physical condition items that are generally excluded from the scope of the PCA, but that clients can choose to include. Costs for these would be in the consultant’s fee proposal.

“Active Exclusions” include identifying capital improvements or upgrades and testing equipment. Also excluded are engineering calculations to confirm HVAC, electrical, plumbing and structural systems have adequate capacity for the property. This is often a necessary part of a PCA on a major property, and to this end the consultant will provide one or more specialty subcontractors to assess structural, façade, HVAC, plumbing, electrical, fire protection, life safety and vertical transportation systems.

“Additional Issues“ which the client may select include: Seismic, Design Conditions for Natural Disasters, Insect Rodent Infestation, ADA Requirements, FHAA Requirements, Mold, Indoor Air Quality and Security Systems.

Going Beyond: some real-life examples
I perused a number of past reports, and picked some examples of additional items that clients chose to go beyond the standard scope of the PCA:

1. Evaluate soils reports prepared at the time of preliminary site investigation.
This type of report assists the structural engineer in foundation and superstructure design. The report would include recommendations for foundation design and, if foundation drawings are available, these would be checked against the report
2. Report on the condition of underground utilities.
3. Calculate replacement costs.
4. Make a personal visit to the building/zoning/fire departments to get records.
5. Provide a copy of the original building permit. If not available, then obtain a copy of the most recent certificates of occupancy.
6. Answer the following questions – What does the zoning code consider a “Total Loss” in the event of a major disaster? In the event of a Total Loss would the property have to be built to the current zoning code (setbacks, parking and others)? If so, would there be significant changes to the property that would affect its economic viability (increased setbacks, smaller footprint, increased parking, smaller footprint, current use still allowed)? In the event of a smaller loss, could the property be rebuilt as is and be considered “legal nonconforming”?
7. Are the fire sprinklers in place manufactured by Central Sprinkler between 1989 and 2000 (and thus subject to recall)?
8. Provide information on the energy efficiency of the building and systems including, if available, the building’s Energy Star rating and LEED certification. Provide a description of improvements that have been made or are planned to be made to increase efficiency or improve the sustainability of the property.
9. Where the seismic analysis shows a Scenario Upper Loss from the Design Basis Earthquake and the proposal provided for it, prepare a recommendation for structural modifications to achieve a loss of 15% with preliminary costs.

Closing Thought
Client specific requirements should, of course, be a topic when you’re introducing your company for the first time. Pricing the work will always be difficult. It’s a business risk with possibly a larger return for a long term relationship.

Property Condition Assessments in San Francisco

The real estate market in booming in the City of San Francisco and so is our Property Condition Assessment (a.k.a. Commercial Building Inspection) practice.    As real estate investors from inside and outside the Bay Area rush to invest in the nation’s hottest real estate markets, they need to understand the buildings that they are buying and for this goal they need local engineering expertise.   In addition to Property Condition Assessments, two other commercial building assessments San Francisco real estate investors and lender should consider are:

  • Seismic Risk Assessments, and
  • Energy Audits / Energy Benchmarking.

San Francisco Property Condition Assessments

Property Condition Assessments (PCAs) are performed for lending institutions or prospective purchasers of properties and the scope of work can vary depending on the intended use.   For lenders the Property Condition Assessment provides a tool for comparing the cost of maintaining the property to the property’s income.  For prospective purchasers, a Property Condition Assessment provides an understanding of the building systems and associated issues and the potential costs with owning a property and the findings of the PCA can be used in negotiations with the seller.  The user of a PCA should carefully consider their requirements and the purpose the report is serving, as well as their risk tolerance, in determining the appropriate level of inquiry when ordering a PCA report.  Partner can provide assistance in determining what level is appropriate for specific transactions and our expertise in San Francisco and our knowledge of the area’s developmental history and building practices allows us to service our clients efficiently and effectively.

Seismic Risk Assessments in San Francisco are Critical

A Seismic Risk Assessment – a.k.a. Probable Maximum Loss (PML) estimation – is a valuable tool utilized to evaluate expected seismic losses for properties in regions such as the San Francisco Bay Area.  A seismic risk assessment evaluates the regional seismic hazard, site conditions, and building vulnerability.  A loss estimate, referred to commonly as the PML, is calculated based on the synthesis of the regional seismic hazard and the expected performance of the building(s).  For seismic due diligence related to commercial real estate transactions, the Probable Maximum Loss is most often expressed as the Scenario Expected Loss (SEL), which corresponds to the mean or average expected damage based on an earthquake with a 475-year return period.  This earthquake scenario is referred to as the Design Basis Earthquake (DBE) ground motion, which is used as the basis for design of new buildings and rehabilitation of existing buildings in accordance with modern seismic codes.  The key to obtaining a good quality Seismic Risk Assessment is engaging a qualified company with licensed professional engineers experienced in building design, retrofit, and seismic risk assessments.  The center of Partner’s seismic risk practice is located in San Francisco.  Partner’s engineers utilize the industry best practices and decades of structural engineering experience to provide comprehensive seismic risk and hazard mitigation services.

San Francisco Energy Audits and Benchmarking (Commercial Building Energy Performance Ordinance)

The City and County of San Francisco adopted the San Francisco Existing Commercial Building Energy Performance Ordinance in 2011 requiring owners of commercial buildings to obtain energy efficiency audits and to disclose energy performance annually (benchmarking).   Building owners are responsible for annual benchmark reporting using the Energy Star Portfolio Manager tool.  The first deadline for compliance, requiring buildings greater than 25,000 square feet to submit an Annual Energy Benchmark Summary (AEBS) report, has already passed.  AEBS reports are due annually on April 1st and energy audits are required once every five years.  Building energy consumption is a controllable operating cost of building owners and is a larger source of greenhouse gas emissions than transportation.  Paying attention to energy efficiencies and other “green” features in buildings can increase the value of the property and also allow building owners to be more competitive in attracting quality tenants.   A large number of buildings have failed to submit AEBS reports by the first reporting deadline and are out of compliance.  Partner’s energy practice can provide professional engineering services to get your building into compliance and keep it in compliance.

Free Seismic Risk Assessment Webinar (aka Probable Maximum Loss)

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.

FHA and Fannie Mae Announce Green Refinance Plus

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.


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.

Upcoming ASTM E2797-2011 BEPA (Building Energy Performance Assessment) Standard

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.

Property Condition Assessment and Energy Audit

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.

SBA SOP 50 10 5 (C)

With the latest SOP revisions taking effect on October 1st, 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:

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

Managing Environmental Liability

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.

Property Condition Report plus Energy Audit

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.

Probable Maximum Loss Reports

If the big one comes, how much damage will your loan portfolio sustain?  A building with significant damage runs a high risk of falling into foreclosure.  If a lender is active in a seismically active state such as California, they may want to get a handle on their seismic risk by ordering Probable Maximum Loss Reports.  

The Probable Maximum Loss Report predicts the amount of damage a building will sustain when the 475-year earthquake comes.  Just like we can estimate how large a 100-year flood will be, we can estimate the magnitude of a 100-year earthquake—and a 475-year earthquake.   We choose this non-round number because the 475-year event has a 10% chance of occurring in the next 50 years.

A PML Report expresses the seismic damage as a percentage intended to represent the expect damage to the building divided by the replacement cost of a building.   For example, if a building that costs $10 million to build and has a 10% PML, then when the 475-year event occurs we are predicting that the building will experience $1 million in damage.  

Most lenders treat the PML as a sort of pass/fail.   Any building with a PML lower than 20% is seen as an acceptable risk and buildings with PMLs over 20% have seismic risks that require mitigation.   Typical mitigation takes the form of either earthquake insurance (expensive) or seismic retrofit (usually expensive).   

The PML has long been a somewhat controversial product for mortgage bankers and borrowers, as too often they have seen two engineers return two significantly different PML numbers for the same property.   Historic use of the inconsistently defined term PML has left much confusion over what has been the measure of risk in the past and what is the comparable measure under ASTM terminology.  This is because the methods employed to calculate the PMLs by engineers have varied widely. Recently, ASTM has updated their original PML Standard with ASTM 2026-07 and published a new standard aimed directly at lenders, ASTM 2557-07 and these new standards have gone a long way toward creating consistently.

The ASTM Standards is more of a toolbox than a strict scope of work.   ASTM 2026-07 is a very flexible standard; this standard is a tool box that literally offers 768 different ways to do a PML.   For a banker, PMLs that are calculated differently, and cannot be compared to each other, create unwanted inconsistency in their underwriting process. 

To fix the 768-types-of-PMLs problem, a banker must specify which method they need.  Here is how to order a PML: ASTM 2557 recommends that the PML is reported as the Scenario Expected Limit, Design Basis Earthquake (DBE), 475-Year-Event and I recommend adding: Level 1 Building Damageability Assessment, Level 1 Building Stability Assessment, Level 1 Site Stability Assessment, and Calculated by the Thiel Zsutty Method.    Wow…that is a mouthful.

Insist that your engineers follow these tips and you will find that your PMLs are more transparent, understandable, and consistent with other finance industry PMLs. 


1.       Report one number, define the PML as the SELDBE.   Offering PMLs as both the Scenario Expected Limit (SEL) and the Scenario Upper Limit (SUL) is too confusing.  Accept the recommendation of ASTM E2557 and require your engineer to report the PML as the SEL only. 


2.       Require that the engineers use the Thiel Zsutty Method to calculate the PML.  This is the most commonly used method and is more transparent than other calculations (the importance of transparency is discussed below).  While the ASTM Standards do not specify a method of calculating the PML, if you allow one engineer on your panel to use Thiel Zsutty and another to use their own proprietary methods, then you will receive inconsistent results.


3.       Show the math.   Simply giving a high PML result without demonstrating how it was derived makes conducting a peer review futile.  How can anyone discuss or refute a computation that is absent?  Peer reviewable work is a fundamental hallmark of the engineering profession, and requiring engineers to show their work should be standard.


4.       Explain the “b” value.  The most controversial variable in the Thiel Zsutty Method is clearly the Building Vulnerablity Parameter, or the “b” value.   The engineer should explain how the “b” value was chosen.  The determination of a building’s damageability factor, b, starts with a table look-up and then must be carefully adjusted to specific earthquake damageability characteristics of the building that the engineer encounters in the field.  Absent this discussion, the report suffers from the fatal flaw of being inscrutable.


5.       Require the work to be done and signed by a registered engineer.  Structural assessment of buildings is at the heart of engineering work.  Only registered engineers possess the requisite certification, knowledge and skill for performing PMLs. 

Bankers have long been frustrated by the lack of consistency and transparency in PMLs.   If bankers instruct the engineers very precisely, the PML products delivered by the engineering community will feel less like supposition and more like science.


By:          Joseph P. Derhake, PE

Partner Engineering and Science

Phone: 800-419-4923