Jeff Coyne Director, GRS | Corteq (510)

Jeff Coyne
Director, GRS | Corteq

Brad Ferris_mhp

Brad Ferris, S.E.
Director, MHP

The American Society of the International Association for Testing and Materials (ATSM) recently released new standards relating to commercial real estate. As is the case with every new ASTM update, a lot of people in the industry are wondering what the pluses and minuses are of the changes enacted. Jeff Coyne, Director at GRS | Corteq, spoke with Brad Ferris, Director at MHP, who gives us some insight into how the revisions impact the business of commercial real estate.

Coyne: What was the reason for the 2016 ASTM Revisions, and how will it impact current PML users?

Ferris: ASTM standards are revised periodically, and it had been nine years since the last update. Users and providers had been pushing for updated standards to drive more consistency in the quality of reports being produced.

What are the changes that were made, how do they affect the way seismic assessments are done, and how do they differ from the old standards?

The most significant change was requiring that for Level 1 and higher seismic risk assessments, both the field survey and report production must be completed by a licensed civil or structural engineer with seismic design/evaluation experience. All reports must also contain a one-page sheet that clearly states the level of investigation, loss results, ASTM exceptions, and personnel involved in producing the report. No additional work is required of the provider for Level 0, 1, 2 or 3 assessments. However, the provider must use licensed professionals from start to finish and their reports must be more transparent.

You mention different assessment Levels. Now there is a level 0 PML outlined in the new standard, along with a Level 1, 2 and 3. Can you break down these levels?

A Level 0 assessment is a screening level assessment with high uncertainty that can be completed by anyone. No engineering work is required.

A Level 1 assessment is the typical level of assessment that is completed for real estate due diligence. It has a moderate level of uncertainty that is appropriate for most buildings. Limited engineering analysis is completed, and loss results depend highly on the experience/expertise of the provider.

Level 2 and 3 assessments require significant engineering analysis (typically computer modeling) which enable experienced engineers to provide loss results with relatively low uncertainty. Level 2/3 assessments are appropriate for complicated or high-value assets.

Thanks for that. With that in mind, when would a level 0, level 1, or higher level PML be most appropriate?

ASTM E-2557 provides guidance on when the different levels of investigation should be used.

Generally, Level 0 reports are appropriate when accurate results are not needed or for low value properties located in moderate or low seismic areas.

Level 1 reports are appropriate for the majority of properties located in moderate to high seismic zones, and Level 2/3 reports are appropriate for high value properties located in high seismic zones.

ASTM E-2557 provides a seismic zone map for the US, and provides a means for determining seismic zone based on the 475-year PGA for the site, if known by the user.

Ok, last PML level question then, what are the benefits of a level 0 or level 1 assessment versus a level 2 or 3 assessment?

Increased certainty. Level 2 and 3 reports are appropriate when a building is very complex, where a building is sitting above the users PML threshold, or where Building Stability is in questions. The hope is that detailed structural analysis will show that building behavior is better than assumed under the Level 1 assessment. A Level 2 assessment typically will cost 3-5 times more than a Level 1, and a Level 3 assessment can cost 10-20 times more than a Level 1.

So we can assume a Level 0 or 1 will fit for MOST sites where lender financing is involved, depending on the lender. But a buyer of a site or an owner of a site with known seismic issues may opt for the higher level of PML.

You mentioned ASTM E-2557, but not E-2026 there. Why two ASTM seismic Standards, and what does each cover?

ASTM E-2026 outlines how seismic risk assessments should be completed for any user need; not just PML assessments completed for real estate due diligence. ASTM E-2557 outlines how ASTM E-2026 should be applied specifically for real estate due diligence transactions.

One question I have gotten in the past is how we determine our PML values, and I know there are multiple ways to calculate a PML. Can you give a breakdown of the methods for calculating and how the differ/converge? (specifically ATC, ST-Risk, Thiel- Zutty)?

You can throw in SeismiCat, Hazus and a couple of others into the mix. We have used/evaluated all of these methods. ATC, ST-Risk and Thiel-Zsutty are all related and we do not see significant differences in the base numbers being produced, but we do see big differences in how different providers adjust the base loss numbers. SeismiCat and Hazus provide a direction for the future.

I’d like to follow up on that – what do you mean by “a direction for the future”, and what does the industry as a whole use now to provide these assessments? Lastly, does the method used result in wide-ranging PML numbers hat lenders should consider when making scope decisions?

SeismiCat and HAZUS integrate building-specific structural performance parameters into the damage model. Earthquake losses are determined from building-specific engineering data and not solely on engineering judgement. These are first generation software tools and both have their limitations. Several companies continue to develop improved software tools for earthquake risk modeling.   

The industry typically uses ATC13, ST-Risk or Thiel Zsutty. All provide very similar results across all building types. In 20+ years, we have not had a client require one method over the other. In the future, I do not see the industry moving to SeismiCat or HAZUS or similar “refined” hazard models, nor do I see the industry consolidating behind ATC13, ST-Risk or Thiel Zsutty.  All of the above damage models are referenced in ASTM E-2557 Appendix X3. 

Here’s another common client question – If you have a prior PML, done to the equivalent of the new Level 0, what are the chances that a new PML will differ (i.e. Done to current level 0 requirements with an architect/engineer with ~10 years’ experience collecting site specific info and an S.E. with 10+ years’ experience writing the PML)?   In other words, are there levels of comfort that can be gained to ensure that a property that “passed” the need for insurance under the old standard will yield a PML not requiring insurance again (usually SEL sub-20%)?

The simple answer is no. The primary reason that the standards were changed was there were too many reports being produced that could not hold up to peer review. The new ASTM has also tightened the procedure for engineering peer review of previously completed assessments. It depends on who performed the original study and how well done the report was.

For the vast majority of buildings, there should be little risk of a new PML report resulting in significantly different conclusions (using the past GRS | Corteq methodology above). However, under both the previous and current ASTM standards, older buildings, very complicated buildings, or buildings located in very high seismic regions or challenging geologic settings are difficult to accurately assess at Level 0, and new higher level assessments may find building performance is significantly better or worse.

Who has adopted this new scope of work? GRS | Corteq has consulted with and knows of only a couple life insurance companies to date who has adopted this new standard.

I would think few if any. None of our major clients have asked us to comply yet. It will take time for most providers to catch up. They will have to hire qualified licensed engineers or partner with engineering firms like GRS | Corteq has with MHP.

Lastly , if one of our lender clients does not have an internal technical services group, how do they develop a risk tolerance policy for the new ASTM standard?  

Close consultation with a trusted seismic risk assessment provider. We have provided this service for many lenders and equity groups and have done so in consultation with GRS | Corteq recently. We’d be happy to do it more.

Thank you, Brad, this should help many people know what to consider going forward as the CRE community watches the reaction to this change.

My important takeaways are, to date, most lenders and organizations like the MBA, CREFC, b-piece buyers and ratings agencies have not weighed in on the need to adopt the new ASTM guidance.  Only a small group of lenders has adopted the standard, we are tracking them closely, and GRS | Corteq is on top of this change and ready to meet the new standard in the event it becomes adopted.

For commercial real estate financing transactions, lenders will ultimately drive this change. Deciding to require the new PML standards is up to the individual lender. In the short term, it’s a question that should be asked on both sides – user and provider.

If lenders do adopt the new requirements, it will take some time. They will need to revise their scope(s) of work related to PMLs, and make the decision on what level(s) of assessment to require. The final decision will ultimately come down to the lender’s seismic risk tolerance – perhaps even on a deal to deal basis.

Until these standards are adopted GRS | Corteq can comply with either the “older” PML requirements or with the new standards. I tried to answer my most frequently asked questions in consulting with all my clients.   Feel free to email me or give me a call at (510) 962-9534 if you would like to discuss this more.