What Exactly is Probable Maximum Loss?

April 25, 2013

A Probable Maximum Loss report (PML) is an important tool used to evaluate how a building may behave during a seismic event, which in turn helps determine the buildings financial risk. Real estate investors, developers, property owners, and lending institutions need this information to make informed decisions regarding assets, especially in earthquake prone areas.

The methods engineers use to calculate PMLs can vary greatly. The American Society of Testing Materials (ASTM) standards created in 2007, ASTM E2026-07 Standard Guide for Seismic Risk Assessment of Buildings and ASTM E225 Standard Practice for Probable Maximum Loss (PML) Evaluations for Earthquake Due-Diligence Assessments, have helped create consistency but more detailed information about the needs of the client can have a deciding factor in which method an engineer may use to calculate a PML.

Characteristics such as building type, critical connections, local soil conditions and local seismic activity are evaluated and used to calculate the PML value, which is expressed as a percentage of the dollar value of the damage in terms of the building’s replacement cost.  This can be calculated for a 50 year earthquake and a 475 year earthquake (the difference is in magnitude and the analogy of 10 and 100 year floods is often made). These factors, along with statistical data and observed damage to unreinforced buildings, go into widely used and accepted formulas to derive a theoretical model.  The PML report predicts the amount of potential damage a building will sustain when each of these 50 and 475 year earthquakes occur.

It should be noted that the PML estimates the likely cost of damage to a property due to a probable seismic event, not guarantee how the property will perform. The PML report actually reads as such, expressing seismic damage as a percentage intended to represent expected damage of a building divided by the replacement cost of the whole building. Many lenders have a pass or fail type system with the PML percentage. Generally, a building with a PML lower than 20% is acceptable and one with a PML over 20% is considered to have more risk and may require mitigation in the form of insurance or retrofitting, both of which can be expensive.

 

For upcoming webinars on Seismic Risk Assessments, PMLs and commercial real estate due diligence, visit http://www.partneresi.com/partner-webinars.php.


Phase I ESAs in Riverside County

March 5, 2013

The Partner Corona office provides Phase I Environmental Site Assessments, Phase II Environmental testing, Property Condition Assessments, and Asbestos Surveys in support of commercial real estate transactions. Partner Corona staff are familiar with the blend of suburbs and past agricultural use that make Riverside County unique.

Partner is the national leader in Phase I Environmental Site Assessments by volume. Most reports are performed to meet the standards of ASTM E1527-05. Partner often customizes reports to meet individual client or agency lender’s (Fannie MaeFreddie Mac) requirements.

Those that do commercial or multifamily transactions in Riverside County truly understand the importance of accurate Probable Maximum Loss Reports (PMLs). Understanding the local geology and correctly reflecting the math in a PML report is most important to those that purchase or lend on commercial or multifamily property in Riverside County.

Partner performs Phase II Environmental Testing either in support of a financing decision or to meet the requirements of the Riverside County Department of Environmental Health. Most of our reports are performed to meet the standards set by ASTM E1903-27(2002). Partner Corona staff understands the local geology of the Peninsular Ranges, as well as regulatory agencies such as the Santa Ana Regional Water Quality Control Board.

Some recent projects and experience that provide insight into our robust Southern California consulting practice include:

Property Condition Assessments, 45 site portfolio in Southern California

Partner performed Property Condition Assessments on 45 office buildings mostly in Los Angeles, Long Beach, Riverside, and San Bernardino. Our PCAs were done in support of acquisitions and were all completed within two weeks.

Environmental Due Diligence on 330 Gas Stations in Southern California

Partner performed environmental due diligence on 330 gas stations located in the six large Southern California Counties: Los Angeles, Ventura, Orange, San Bernardino, and Riverside. The gas stations had a lot of subsurface data and over 100 open cases. Partner reduced a large amount of data and quantified the portfolio’s environmental liability for our client.

 

For more information on Partner’s Riverside County Practice, visit

http://www.partneresi.com/city/corona.php


Due Diligence in San Diego

January 22, 2013

 

The Partner San Diego staff is familiar with the diverse geographical as well as the geological characteristics that are particular to San Diego. The Partner San Diego office provides Phase I Environmental Site Assessments, Phase II Environmental testing, Property Condition Assessments, and Asbestos Surveys in support of commercial real estate transactions.

In addition to providing Phase I ESAs, Partner provides Property Condition Assessments and Commercial Building Inspections for a wide variety of clients; including, CMBS lenders, Fannie Mae/Freddie Mac lenders, and equity clients. Most of our reports are performed to meet the standards set within ASTM E2018-08 guidelines.

While Partner offers Probable Maximum Loss Reports (PMLs) to every seismic zone in the United States, those that do commercial or multifamily transactions in San Diego truly understand the importance of an accurate PML report

Partner performs Phase II Environmental Testing either in support of a financing decision or to meet the requirements of the San Diego Regional Water Quality Control Board. Most of our reports are performed to meet the standards set by ASTM E1903-27(2002).

A zoning report is a necessary part of many real property transactions because the current owner is responsible for existing zoning violations. Partner’s Zoning Reports take usage regulations, San Diego and municipality provisions into consideration as well as other regulations; such as the Americans with Disabilities Act.

Some recent projects and experience that provide insight into our robust Southern California consulting practice can be found at: http://www.partneresi.com/city/san-diego.php


Environmental and Engineering Due Diligence in Los Angeles

January 17, 2013

Whether your property is located on the coast of Los Angeles or the hills, any environmental due diligence firm engaged for commercial properties in Los Angeles should fully understand the variances of these landscapes. Partner Engineering and Science, Inc. is headquartered in the Los Angeles area. The Partner Los Angeles team is experienced with multiple aspects of the environmental due diligence process, including Phase I Environmental Site Assessments, Phase II Environmental Testing, Property Condition Assessments, Probable Maximum Loss Reports, Asbestos Surveys, and Zoning services.

Los Angeles is rich in properties that are both historical and newly built. As such, it is important for anyone dealing with commercial or multifamily properties to gain an understanding of the immediate and future repairs of a property with a Property Condition Assessment. Partner is able to inspect the building’s systems and provide a table that indicates the immediate and future investments that will be required for the property.

Those that do commercial or multifamily transactions in Los Angeles truly understand the importance of an accurate Probable Maximum Loss (PML) report. A firm’s understanding of the local geology and correctly reflecting the math in a PML report is critical to the accuracy of the report. Partner offers Probable Maximum Loss Reports (PMLs) to every seismic zone in the United States, and our Los Angeles office has extensive experience with local Seismic Damageability Assessments.

Some recent projects and experience that provide insight into our robust Southern California consulting practice can be found at http://www.partneresi.com/city/los-angeles.php


Due Diligence in San Francisco

January 10, 2013

When hiring an environmental and engineering due diligence firm for properties in San Francisco, one should be sure that they are familiar with the blend of dense metropolitan areas, suburbs, and agricultural areas that make the Bay Area unique. Many clients look to environmental professionals who have an intimate working knowledge of a particular region, and The City and County of San Francisco is no exception, having a unique history in relation to other cities on the West Coast. The Partner San Francisco team excels at integrating thorough regional knowledge into the Phase 1 Environmental Site Assessment, providing clients with a superior due diligence product.

The San Francisco Partner team provides Phase I Environmental Site Assessments (ESAs), Phase II Environmental testing, Property Condition Reports, Asbestos Surveys, Lead Testing, and Seismic Assessments in support of local and nationwide commercial and multi-family real estate transactions. Having a firm that knows the requirements of local regulatory agencies throughout the course of a Phase I, and if necessary a Phase II, is important. Partner performs Phase II Environmental Testing either in support of a financing decision or to meet the requirements of the San Francisco Bay Regional Water Quality Control Board. Our San Francisco environmental professionals understand the highly variable geology found in the Bay Area due to plate tectonic activity as well as regulatory agencies such as the State Department of Toxic Substances Control (DTSC).

When engaging a firm specifically for a Probable Maximum Loss Report on commercial or multi-family property in San Francisco, it is most important that the local geology is understood and the math correctly reflected.  Partner recently completed 16 Probable Maximum Loss Reports (PMLs) on multi-family properties in San Francisco. The buildings were built in the early 1900s and had several seismic risk concerns.

More recent projects and experience that provide insight into our Northern California consulting practice can be found at http://www.partneresi.com/city/san-francisco.php


Probable Maximum Loss Reports

December 11, 2012

The United States is divided into four zones depending on seismic hazard risk. Typically, real estate investors, developers, property owners, and lending institutions are all concerned about assets in seismic zones 3 and 4. Obviously, the areas more prone to earthquakes have a higher risk of loss to lending institutions. To assist in the underwriting transaction, Partner performs Seismic Damageability Assessment/Probable Maximum Loss reports.

The Probable Maximum Loss, PML, is the tool used most by real estate investors and lenders to evaluate how buildings will react to a seismic event. A PML evaluates the likely costs incurred from seismic damage to structures on a given site, taking into consideration building types, critical connections, local soil conditions, and local seismic activity. The PML is intended to suggest how the property will be affected by a probable seismic event, not guarantee how the property will perform during seismic occurrence.

PMLS can be calculated for 50 years and/or 500 years and can be expressed as a “Scenario Loss” estimate. The Scenario Upper Loss (SUL) is the scenario loss that has a 10% probability of exceedance due to the specified earthquake scenario as identified in the ASTM E2026-07 Standard Guide for Seismic Risk Assessment of Buildings (the Standard), and the Scenario Expected Loss (SEL) is the expected loss value due to the specified earthquake scenario. Therefore, the SUL represents an upper loss estimate, and the SEL represents an average or expected estimate.


Commercial Building Inspection

January 23, 2009

When buying a commercial building, real estate investors are well served to engage a high quality building engineering due diligence firm to conduct a Commercial Building Inspection.   Commercial Building Inspections are also referred to as Property Condition Assessments.  

When clients call me for a Commercial Building Inspection, I make every effort to understand their needs.  Often I propose a walk through inspection, were an experience building inspector walks through the asset and inspects all building systems.  The inspector prepares a comprehensive Property Condition Assessment Report which includes a discussion of the following building systems:

          Structure;

          Roof;

          Building Envelope;

          Mechanical, Electrical, and Plumbing;

          HVAC Equipment

          Paving;

          Landscaping;

          Fire Suppression and Security Systems;

          Elevators;

          ADA Compliance.

My inspector will include in the report an Immediate Repairs Table and a Replacement Reserves Table.   The second table will typically estimate the building’s capital replacement schedule for the next twelve years.  

When clients are looking for a more detailed report I offer a Property Condition Evaluation report which includes specialist inspections.  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 mechanical specialist, roof specialists, and elevator specialist.  The specialist invests 4 to 8 hours inspecting only the one system.  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. 

In two out of three engagements, we help our client get a significant adjustment from the seller.   In one out of three engagements, we help our clients get a adjustment of 5 times our fee or more from the seller.   This service really pays for itself!


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