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.

Graphic showing steps in assisting owners manage risk

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

Net Present Value Calculations are quite effective for justifying retrofit options.

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:

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

Before retrofit PL and PML Table

(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:

After retrofit PL and PML Table

This table demonstrates that retrofitting is cost-effective when expected losses are analyzed over 30-years.

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:

Bar chart showing economic benefit of retrofitting

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.