EL SEGUNDO, CA-For investors buying commercial real estate in earthquake-prone areas, such as this state, a Probable Maximum Loss (PML) report is a key ingredient in making an investment decision. The problem is deciding which kind of report to get and the fact that the industry doesn’t yet have a standard measuring stick, according to Joe Derhake, president of locally based Partner Engineering and Science, Inc.
“It’s a very flexible document, so it is very important to be specific,” Derhake said during a recent webinar, his firm hosted on the subject. “If you’re just saying ‘Give me a PML,’ that is a bit of a vague request.”
(Stay tuned for a Partner Engineering and Science, Inc., webinar on GlobeSt.com Nov. 1.)
The reports, which were adopted by the commercial real estate industry from insurance companies in the 1990s and are enacted in a form called an ASTM, examine a number of criteria before determining how much value an asset can lose in the event of an earthquake. Among the things taken into consideration are: how a building was constructed, the type of soil it sits on, the extent of the fault line it is over, and potential danger from nearby structures. In general, if a PML finds that there is a 20% or more chance of an asset sustaining major damage, mitigation is needed.
Some types of construction methods, such as unreinforced masonry, are going to cause more problems, than say, a building built with a light metal frame. Derhake gave a very specific example: “One story above under-tuck parking is bad. Two stories is worse.”
To get a thorough PML report, Derhake insisted that some key criteria need to be met. Engineers must put an asset through an equation called the Thiel Zsutty Method that takes into account the building’s damageability, soil structure, ground acceleration and other factors.
Derhake said that investors want to get both Scenario Expected Limit (SEL) and Scenario Upper Limit (SUL) reports from an engineer. The SEL provides what would happen if an earthquake produced expected damage, while the SUL shows a scenario with more extreme damage.
Either way, it is best to be thorough. Intensive seismic underwriting will protect owners’ portfolios from assets that are going to fall apart.
“When the big one comes, some lenders are going to do better than others,” he said. “The ‘We survived Northridge’ argument isn’t going to work.”
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