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The Commercial Capital Gazette
Commercial Mortgage and Real Estate News
Published By 1st Coastal Commercial Capital
you get into very large commercial loans, especially in California, the issue of
earthquake risk looms large. When lending on large commercial properties
constructed prior to 1980, commercial lenders will sometimes require a PML
PML Report is an
earthquake damage report completed by a civil engineer. The report asks the
question, “How badly damaged would this building be if there was a really big
earthquake?” Is the building going to completely collapse, like those
unreinforced masonry buildings in San Francisco did in 1989 during the Loma
old friend, Mike Thurman, was actually at Candlestick Park for game three of the
World Series when the Loma Prieta earthquake hit. Fortunately the stadium was
well-designed to absorb earthquake shock, and everyone was able to calmly leave
the stadium to drive home.
those driving home to the East Bay discovered that the central strand of the
Oakland Bay Bridge had collapsed, hurtling several passengers and their cars to
their death hundreds of feet below. Interesting note: When a section of the
upper-deck freeway in Oakland collapsed onto a lower deck, sadly crushing and
killing 60 drivers below, among the victims was a car thief attempting to make
specifically a PML Report seeks to quantify the Probable Maximum Loss.
The Probable Maximum
Loss (PML) is a tool used to evaluate the
seismic risk of a building and identify assets with high seismic risk. The
Probable Maximum Loss report identifies the PML value, expressed as a percentage
of the building's replacement cost and estimates the potential damage during a
475-year earthquake - the lower the
percentage, the lower the expected damage. The PML value can be
expressed either as the Scenario Expected Loss
(SEL) or the Scenario Upper Loss (SUL). They mean the
the Maximum Probable Loss is too high – let’s say greater than 45% - a lender
making a large commercial loan might require earthquake insurance. Earthquake
insurance is phenomenally expensive, on the order of 2% to 3% of the value of
the building annually!
make matter worse, the earthquake insurance deductibles are huge – on the order
of 15% to 20% of the value of the property.
suppose you own a $15 million commercial building in Los Angeles. The land is
worth is worth $5 million, so you only insure the $10 million building. Suddenly
an 8.2 earthquake hits L.A., the building collapses, and the loss is total. Even
if you had the entire building insured, your insurance company might only pay
you $8.5 million, rather than your entire $10 million loss.
to make matters worse, the insurance company probably wouldn’t survive to pay
the claim anyway.
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