Q&A With EBI Consulting's Doug McCan

EBI Consulting program manager Doug McCan leverages his 10 years of experience conducting due diligence to service a diverse array of commercial real estate clients. He specializes in seismic risk evaluations, a vital component of the full spectrum evaluations he and his team use to carefully compile, deliver and interpret data for clients. We asked him to explain how that works and why it's necessary.

Bisnow: Why do your clients seek you out for full spectrum evaluation, and what does it entail?

Doug: EBI Consulting is a leading provider of independent, third party, due diligence services to the real estate industry. Our services are intended to provide information on property risks to assist investors in their decision-making. A seismic report, generally engaged alongside the vital environmental site assessment (ESA) and property condition report (PCR), assesses risk of earthquakes. These disclose hazardous conditions and give an estimation of costs to remedy the issues.

Bisnow: What other entities or parties require an ESA or PCR?

Doug: Most financial institutions, PE groups, CMBS firms, REITs, insurance companies, government organizations, developers and property owners need real estate due diligence. 

Bisnow: Is the report valuable leverage for tenants, developers, buyers and sellers in negotiations?

Doug: The ability to use the report as leverage depends upon the scope of our evaluation and the report’s reliance language. Seismic reports are typically engaged as either a standard lender, debt-level scope or as part of an equity scope evaluation. The latter is often used as a bargaining chip.

In the case of a property where the building or a set of buildings has a Probable Maximum Loss (PML) above the generally accepted 20% threshold, a potential lender or equity partner may require either a seismic retrofit of the property or issuance of an earthquake insurance policy.

In either case, the borrower, building owner and/or responsible party will be required to set aside funds for the retrofit or for earthquake insurance. A potential buyer of this property may also present a lower offer, given the knowledge of potential vulnerabilities and forecasted capital improvement and/or earthquake insurance costs. So the report essentially informs who’s responsible for paying for what.

Bisnow: I heard you reference PML. Would you explain that?

Doug: It's a method for assessing how a property will be affected by a large, probable seismic event. The PML is the ratio of the probable damage to the replacement cost. The higher the percentage is, the higher the expected damage.

The factors incorporated in the model include:

• The property’s location relative to earthquake faults, liquefaction and earthquake-induced landslides;
• The property’s construction type, including type of load-bearing frames or walls; the presence or absence of any vertical or horizontal structural irregularities (soft stories, discontinuous shear walls, re-entrant corners, etc.);
• The quality of critical connection elements for frames and walls (moment-resisting joint connections, wood sill plate anchorage to foundations, the connections of wall and frame elements to roofs and floors, etc.);
• The quality of non-structural equipment anchorage (anchorage of rooftop HVAC units, presence of seismic straps at water heaters, lateral bracing of fire sprinkler lines, etc.).

Bisnow: How long does the process typically take?

Doug: The majority of standard American Society of the International Association for Testing and Material’s (ASTM) Level 0 or Level 1 evaluations are performed within a two- to four-week turn time, depending on whether a single property or large portfolio is being administered to.

The first step is the site visit and gathering of various documentation, such as original structural drawings, site-specific geotechnical reports and prior PML reports, among others. Then there's the mathematical analysis to determine the loss estimates. The final step is the report preparation, review and delivery to client, and subsequent consultation with one of our team members, who can help interpret the findings if necessary.

Bisnow: What are some examples of seismic retrofit recommendations to strengthen building elements commonly given in reports?

Doug: A couple of common recommendations address “soft story” conditions or deficient out-of-plane, wall-to-roof-anchorage connections.

Soft story conditions are found in a number of older building types, including apartment buildings with parking at the building’s first story (“tuck under parking”) or buildings with first level retail storefronts. A number of cities, like San Francisco and Los Angeles, have recently adopted ordinances regarding these building types. A common retrofit scheme is to install load-bearing steel frames (moment-resisting and/or braced frames) or additional shear walls to stiffen the building at its first level, and provide the necessary lateral capacity. 

Bisnow: How will the changes to the risk assessment standards impact clients? Does the more rigorous or stringent standard affect cost and length of time needed to complete the assessment?

Doug: Two of the most significant changes with the new 2016 ASTM standards, 2026-16a and 2557-16a, relate to revisions to the qualifications of the team preparing the seismic risk assessment and the importance of the client in providing the original construction drawings for the investigation.

For clients that require a Level 0 assessment only, minimal changes with respect to cost or turnaround time should be anticipated relative to the implementation of new standards. The report is marginally longer with a few additional statements and appendices, but the process is otherwise very similar. Level 0 is best suited for lenders/investors that are comfortable with PML estimates calculated the way they have been in the past. It’s for those who are using the seismic report as an internal risk document and are unlikely to have any other users involved.

For clients that require at least a Level 1 assessment, the rigor of the assessment has changed. This level imposes stricter experience and professional licensing requirements for the field assessment, report preparation and review. As a result, the level of effort has increased. In some cases, depending on the size of the property and where it is located, the length of time required to complete the assessment may increase by one to two weeks, and the overall cost of the assessment may double.

Bisnow: Could you explain what the different levels of investigation entail?

Doug: EBI is currently able to complete Seismic Risk Assessments at the following ASTM levels of investigation: 0, 1 and 2. The following is a summary of what these different levels of investigation entail:

• Level 0 is often referred to as a screening level or desktop review and is based on general information about the building type, characteristics and site information. It is considered to have a high uncertainty level.
• Level 1 is generally considered an engineering cursory review, including a review of construction documents and a site visit by a licensed professional or structural engineer. It is considered to have a moderate uncertainty level.
• Level 2 is considered a detailed evaluation. It is generally conducted by a licensed professional or structural engineer with specific knowledge of the particular building systems and requires specific engineering calculations to determine the anticipated structural behavior of the building during an earthquake. Level 2 is considered to have a low uncertainty level.

Bisnow: How do clients enlist your services for one of the aforementioned reports?

Doug: Those interested in engaging EBI for seismic risk assessment should contact Dan Spinogatti at 623.215.0757 or dspino@ebiconsulting.com, or me, Doug McCan, at 949.842.8699 or dmccan@ebiconsulting.com.

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