Most structured finance lenders – CMBS, Fannie Mae, Freddie Mac - and most life companies require a Seismic Damageability Assessment, a.k.a Probable Maximum Loss Report, if the asset being underwritten is in an area of the country with high seismic activity.
A lot of people translate this to “everything in California.” Actually, 15 states have high seismic zones, and as exhibited yesterday with a 5.8 earthquake in Virginia, even relatively low risk areas can be subject to major seismic activity.
U.S. Seismic Maps
So how do you know when you need to think about seismic risk? There are lots of maps of seismic activity for the United States, so which map should an underwriter use? The U.S. seismic map that almost everyone uses is seismic map from the Uniform Building Code (1997). This map is integrated into one of the ASTM Standards (E2557 Standard Practice for Probable Maximum Loss [PML] Evaluations for Earthquake Due Diligence Assessments). It is typical to require Probable Maximum Loss Reports in areas classified as Zones 3 or 4 by this map. Our firm prints up laminated versions of this map for underwriters – if you want one just send me an email.
For those who are not interested in conforming to the rest of the real estate finance world, you may wonder if this is the best seismic map. Hmmm? Maybe not, but the difference is minimal. The United States Geologic Service (USGS) published a more recent and more accurate National Seismic Hazard Map in 2008. It would be prudent to require a PML on areas within the three highest hazard tiers.
Seismic Maps for Canada, Mexico and Europe
If your lending footprint is larger than the United States you may be interested in seismic hazards in Mexico, Canada and Europe. Below are links to the best seismic maps for each region.
My firm does Probable Maximum Loss Reports in Canada, Mexico and Europe to the same ASTM standards: ASTM E2026 Standard Guide for Seismic Risk Assessment of Buildings; and ASTM E2557 Standard Practice for Probable Maximum Loss (PML) Evaluations.
Probable Maximum Loss Webinar
I will be putting on a seismic webinar on November 1st where I discuss minor issues like seismic maps and larger issues like the difference between the Scenario Expected Limit (SEL) and the Scenario Upper Limit (SUL). If you use PMLs as an underwriting tool, you will find this webinar an hour well spent. If you are interested email me at email@example.com.