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.
January 9, 2009
Probable Maximum Loss (PML) Assessments are a tool used to understand the seismic damageability of buildings. A PML report predicts the amount of damage a building will receive as a percentage of the building’s replacement cost during the design seismic event, typically the 475 year earthquake (the largest earthquake in the next 475 years). A PML is expressed as a percentage. Most lenders treat PMLs under 20% as passing and they require retrofit or earthquake insurance for buildings with PMLs over 20%.
CMBS and Fannie Mae Lenders generally require a PML in seismic zones 3 and 4 (see zone map).
PMLs are used by the commercial real estate industry to understand the seismic risk associated with buildings and by the insurance industry. The world where I work is the commercial real estate due diligence industry. In my engineering practice I perform my PML reports to meet ASTM Standards:
I explained the importance of these ASTM Standards in 2008 article in the Scottsmen Guide: All About Probable Maximum Loss Reports.
The ASTM Standards allow for multiple mathematical methods for calculation the PML. I advocate for the Thiel Zsutty methodology, the most widely use method for calculating Probable Maximum Loss within the commercial real estate industry. Advantages of the Thiel Zsutty methodology are transparency and consistency. A PML by this methodology is more peer reviewable.
In choosing an engineer for to perform a PML I advise my clients to look for the following qualifications: registered engineer, 10 years experience with PMLs, and a clear understanding of the ASTM Standards.