Lenders, investors, and insurers have become increasingly concerned with building resilience, including with seismic events. While many commercial real estate (CRE) professionals are familiar with Seismic Risk Assessment (SRA) reports, another metric, Building Stability, can impact underwriting decisions as well. With every damaging earthquake and new mandatory retrofit ordinance, policies are increasingly being updated to include Building Stability. Many financial institutions, particularly Fannie Mae and Freddie Mac lenders, will not finance properties that do not meet the term's requirements. By understanding both criteria, CRE players can more accurately gauge their risk exposure in relation to seismic events.
Seismic Risk Assessment
SRA reports offer Building Damage scenario loss estimates, often referred to as “PML” (Probable Maximum Loss) scores. These indicate the potential financial loss a building might face after an earthquake, expressed as a percentage of the building’s replacement cost. The estimates are based on specific levels of earthquake shaking, typically representing a seismic event that has a 10% chance of occurring in a 50-year time frame.
Historically, if the projected loss exceeds 20% of the building's replacement cost, lenders often require additional earthquake insurance. This threshold is significant because it relates to the typical mortgage structure, where lenders cover 80% of the property's price. If a building's loss after an earthquake surpasses the borrower’s equity (the remaining 20%), the risk of default increases, leaving the lender potentially responsible for substantial repair costs.
Building Stability
Building Stability assessments evaluate a structure’s ability to remain upright and maintain its load-bearing capacity during an earthquake.
According to current standards, a building is deemed stable if it can carry its weight under the stress of earthquake shaking, as defined by the International Building Code. Methods, interpretation, and application of Building Stability assessments have varied over the years, but forthcoming ASTM standard updates should bring needed clarity.
Many financial institutions will either not lend on or invest in properties that do not meet the requirements. If they do, they may require retrofitting within a certain period and/or require costly earthquake insurance.
Key Differences Between Assessments
There are two primary differences between assessing potential building damage and evaluating Building Stability.
Damage assessment: This approach focuses on the potential shaking damage from a large earthquake, specifically based on a 475-year return period. The level of assessment is akin to considering the code minimum design forces to ensure safe egress for occupants after an earthquake.
Stability Assessment: This evaluation looks at the risk of a building collapsing during a more severe earthquake, specifically one with a 975-year return period. This higher threshold assesses whether a building can withstand extreme shaking without failing.
Both assessments use similar data regarding the building and its environment, but the methodologies are different. Unlike most statistical methods used to assess damage, Building Stability methods are more technically driven and code-based. Building codes aim to ensure not only the safety of occupants after a large earthquake but also to prevent collapse during severe seismic events.
It’s important to recognize that there isn’t always a straightforward correlation between damage potential and building stability. Older or uniquely designed buildings may exhibit different results when comparing damage assessments to stability assessments. A building might show lower damage estimates yet still be at risk of collapse during a more intense seismic event.
Conclusion
While scenario loss estimates provide essential insights into the potential financial impact of an earthquake, Building Stability assessments offer a critical perspective on the risk of building collapse. This distinction is vital for evaluating occupant safety, protecting financial investments, and determining the need for retrofitting in anticipation of significant seismic events. Ignoring Building Stability could lead to serious consequences, making it an essential consideration in any comprehensive risk management strategy. Learn more about seismic risk assessment in an upcoming webinar, “Seismic 101: Understanding the Importance of Seismic Risk Assessments” hosted by Partner Engineering and Science, Inc. Click here to register.
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Jason Coray, PE, SE
Jason Coray, PE, SE, is Technical Director of the Seismic practice at Partner Engineering and Science, inc. Mr. Coray has thirty years of structural engineering experience including analysis, design, evaluation, seismic retrofit, rehabilitation, forensic investigation, and assessment of hi-rise, office, commercial, institutional, industrial, and multi-family residential projects. He has designed multiple seismic rehabilitations and monitored new construction and seismic strengthening projects throughout the United States.
