Tag Archives: SEL

Probable Maximum Loss Scope of Work for CMBS Lenders

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

Comments on ASTM E2026— Standard Guide for Estimation of Building Damageability in Earthquakes

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.