# Helping Property Owners Manage Risk

For a sophisticated property owner, a major advantage of **ST-RISK™** is
the cost-benefit feature. Once a building has been evaluated for deficiencies, the
program provides a worksheet that enables the engineer to analyze retrofit alternatives.
Upon adjustment of building features as part of the retrofit scheme, the program
immediately recalculates the seismic risk. In this way, you and the owner can devise
a plan that enhances seismic performance yet meets financial constraints.

Using some simple financial calculations and comparing alternative strategies on a net present value (NPV) basis, you can help a building owner decide which retrofit strategy to choose, and can demonstrate how much money it may save the owner over a given evaluation lifetime (time period).

## Simple NPV financial calculation

Suppose an engineer conducts an evaluation of a 2-story, 12-unit apartment building, consisting of wood frame construction located in Berkeley, California. The rental revenue on the building averages $1,200/mo/unit, yielding a monthly revenue of $14,400. The value of the property is $1.4 million. During the evaluation, suppose the following major deficiencies were found:

- General Building Features
- Strength irregularity
- Soft first story
- Vertical discontinuities
- Wood sills not bolted

- Lateral Force Resisting System
- No redundancy
- Improperly constructed hold-down anchors
- Stucco shear walls

- Connections
- Inadequate wood sill bolt spacing

- Floor Diaphragms
- Inadequate reinforcing at openings
- Large spans inadequately sheathed

- Roof Diaphragms
- Inadequate reinforcing at openings
- Large spans inadequately sheathed

When an **ST-RISK™** risk analysis is run, the following losses are predicted
for the existing structure:

(PL = probable loss, PML = probable maximum loss)

Expected Annual Loss (Structure): $3,820

Expected Annual Loss (Bus. Int.): $1,041

Total Expected Annual Loss (EAL): $4,861

If you assume a discount rate of 2% over 30 years the Net Present Value (NPV) of
Losses is: $107,764

Now suppose you want to compare this to the NPV of a retrofit scenario, for example,
retrofitting only the General Building Features. The new predicted losses computed
by **ST-RISK™** are:

Expected Annual Loss (Structure): $1,430

Expected Annual Loss (Bus. Int.): $23

Total EAL: $1,453

With a discount rate of 2% over 30 years the Net Present Value (NPV) of Losses is:
$32,211<

After analyzing the retrofit costs, it is determined that the cost to retrofit is $50,000. If this is added to the retrofit-NPV then the total cost over 30 years would be $82,711. Thus it is cheaper to retrofit than to accept losses to the existing structure by $25,053 (net present value).

In summary the following bar-chart depicts the alternatives:

Every structure has its unique set of properties whereby risk can be managed and
retrofit scenarios weighed. **ST-RISK™** gives an engineer the capability
of assisting property owners in deciding what to retrofit, recognizing that financial
resources are limited.

An engineer can "play" with the retrofit scenarios and **ST-RISK™**
enables the engineer to examine the modified risk as well as the financial ramifications.
In this way an engineer and an owner can jointly arrive at a cost-effective retrofit
scheme.

**ST-RISK™** does not consider: risk of fire-following earthquake, flooding
due to earthquake (tsunami, levee failure, etc.), failure of sprinkler systems and
associated loss to contents, human casualties, or other loss to merchandise. These
losses could be added to the **ST-RISK™** results by the analyst. The value
of **ST-RISK™** is that it can be used by engineers to support their recommendations
for retrofitting a structure to mitigate shake losses, on a purely financial basis.
The reduction of other losses would additionally benefit to the owner.