This Tool Can Eliminate Costly Surprises for Owners, Sellers, and Buyers.

https://www.ccim.com/cire-magazine/articles/property-condition-review/

Commercial real estate professionals know that a picture is worth a thousand words when it comes to presenting a property for sale or lease. But a well-performed property condition review that reveals the truth behind the pretty picture may be the key to selling, leasing, or repositioning a building.

Just about any kind of property can benefit from a review of its condition. Older facilities in every market segment often require code and Americans with Disabilities Act (ADA) updates or major system revamping for operational efficiency. Even newer construction may have hidden deficiencies that eventually will cause costly repairs. Buildings targeted for rehabilitation or reuse, such as office to residential or warehouse to retail, need a complete review of structural elements and facilities to determine if the new use is viable. And companies leasing space—such as manufacturers or light industrial users—should know if a building’s construction condition can support their needs.

By enlisting a knowledgeable team to conduct a property condition review, real estate professionals and their clients can determine the best way to develop a realistic game plan with each property.

What Is a Property Review?
At a minimum, a basic property review assesses building and site conditions to determine what, if anything, is required to bring the property back to an appropriate functional level. This information helps owners make realistic decisions on operating and maintenance costs, or assures prospective purchasers that the transaction is solid.

More-detailed reviews often are based on the intended use of the property. For example, an owner maintaining an existing use is interested in different conditions than one who is upgrading a property or repositioning it.

For existing properties that require substantial upgrades, the assessment team looks beyond repair and compliance, investigating potential alternative uses and the practicality of making changes required to support these functions. In these instances, if building owners are unable to supply detailed market information on finishes and systems in competitive buildings, the team can conduct a brief survey.

In the case of a sale, even if only a limited amount of information is required to assure due diligence, real estate professionals may want to suggest a more comprehensive review of existing conditions to ensure that no hidden surprises await them. Instead of cutting back on inspection services, the review team can make recommendations only on major items that cost more than $10,000 to repair. Comprehensive reports should include the following categories:

• critical repair and maintenance items required to make the building fully operational and limit more extensive deterioration;
• required major system repairs or replacements, including items that are approaching the end of their useful life within five to 10 years;
• corrections necessary for compliance with building codes, federal requirements, and local ordinances;
• upgrades to make a building more marketable or more cost-efficient to operate; and
• changes necessary to enable a new use, such as converting a warehouse into loft apartments.

The Review Team
The property review team usually is composed of two people, one to review architectural and structural issues (normally an architect), the other to review mechanical and electrical issues (normally a mechanical engineer). For larger reviews, additional architects may be used, especially when significant accessibility reviews are required or the property has a higher percentage of architectural issues to be investigated. When more-detailed investigations are to be conducted, or when specific issues are to be investigated, separate structural and electrical engineers may be used. Smaller, or less in-depth reviews sometimes are performed by a single reviewer, normally an architect. The contract should specify the scope of the review and, when appropriate, the type of personnel who will perform the review.

For an existing property with no change in ownership or financing, the property review team normally is hired by the property owner. In an acquisition or refinancing situation, the team usually is hired by the purchaser or financier, but sometimes is hired by the seller. Even when the team is contracted by the seller, the team often is selected by the purchaser or financier.

Costs of reviews are based on anticipated labor costs plus expenses. They usually are contracted as lump sum or guaranteed maximum price. Costs for a basic review of a straightforward property, with limited expenses, could be $3,000 or less for a two-person review. They could be significantly less per property for reviews of a package of similar buildings. Costs can exceed $50,000 for reviews of larger, more complex properties.

The process of performing the site review and completing the written report could be as short as two to three weeks for a typical review of a smaller property or as long as four to six weeks for a more complex property.

In an acquisition, the purchaser normally pays for the review, but the seller may pay if the contract is with it. A seller sometimes will contract for a property review in order to provide up-front information to prospective purchasers. Purchasers also occasionally will guarantee payment.

Visual Analysis First
The first step in any building assessment is a visual survey in which photographs are taken to record existing conditions and deficiencies. If team members cannot determine the cause or extent of a deficient item—such as structural movement or water leaks—during a visual analysis, they may conduct a more in-depth review, such as removing brick, gypsum board, or portions of the roof for materials testing, moisture detection, or other types of testing.

Destructive testing usually is not performed during a standard property review unless an initial review shows an additional investigation may be needed. Environmental reviews differ from this in that material samples usually are required. For nonenvironmental reviews, destructive testing usually is performed only if extensive problems are known prior to the review and investigation is needed to determine the extent or source of the problem. One example is removal of interior wall surfaces in selected locations to determine the extent of damage caused by, and potential source of, curtainwall leaks.

Reviewing property documentation often may reveal potential problems that are not readily apparent during the visual analysis, especially in newer properties. This material also can help determine the causes of visible problems such as leaks.

Useful documents from initial construction and subsequent renovations and additions are:

• geotechnical reports;
• building, site, civil, and landscape plans and specifications (as-builts preferred);
• typical tenant plans and specifications;
• verification of permits, certificates, authorizations, and other evidence of compliance with codes and regulatory agencies;
• architect/engineer certification of design conformance to codes and construction contract documents;
• evidence of quality-assurance programs in effect during construction;
• construction reports prepared by architects and engineers;
• previous reports on facility or system deficiencies and corrections;
• recurring complaints from tenants and building users;
• capital improvement program; and
• property maintenance program and principal maintenance contracts.

Common “Big Ticket” Problems
Every property has its own personality and unique set of conditions, but certain types of problems recur in many kinds of buildings. While not comprehensive, the following list covers some potential “big ticket” areas that a property review considers.

Paving. Annoying to tenants and customers, asphalt paving problems can have significant cost impact, especially at retail facilities with large areas of surface parking. When installed correctly, with sufficient testing and inspection, parking lots should be relatively low maintenance.

Most paving problems are caused by asphalt being laid over improperly prepared subgrade, which leads to cracking, rutting, and breakup of the asphalt surface. Overlaying the deteriorated paving is a significant expense and only a short-term fix-underlying subgrade problems often continue to cause cracking in the new surface. Cutting out and replacing problem areas, while initially more expensive, may be a less-expensive option in the long term.

Exterior Curtainwall Systems. Many different curtainwall systems are in place across the country, including all-glass systems and glass with precast concrete, stone, metal panel, or panelized masonry. Unfortunately, some of these products were not sufficiently tested during installation or were installed incorrectly, so failure of these wall systems is a common condition in buildings completed in the late 1970s and early 1980s.

Telltale signs of curtainwall failure include air infiltration, continuous water leaks, excessive building movement, or glass unit failure (cracking, discoloration, or moisture between insulated panels). If air and water leaks are not occurring in tandem with other conditions, replacing the glazing gasket or applying additional compatible sealant often will fix them.

Potentially hazardous to building occupants, deteriorated structural components caused by long-term water infiltration often are “must do” repairs. This type of renovation may disrupt building occupants significantly because it often requires removing all or parts of the interior and exterior wall surfaces and repairing or replacing structural steel or other wall framing.

If problems are limited to glass moving within the framing, less-expensive options to reglazing the wall often include resetting the glass with properly sized gaskets; applying adhesive sealants to conventional metal settings for a hybrid glass retention system; or replacing, enlarging, or adding structural silicone sealant beads. For glass that actually is coming out of the framing, a mechanical retention piece can be added to the skin to supplement adhesive silicone.

Brick Masonry Wall. While masonry construction has been around for many years, insufficient detailing or lack of oversight during construction—especially of masonry veneer walls—can result in improper installation of critical components such as flashing, weeps, and sealants—often causing significant water leaks and expense. In one case, a reviewer determined that a two-year-old brick 200-unit apartment complex already would require almost $350,000 in repairs to provide sufficient protection against water intrusion.

Masonry construction for historic buildings presents different sets of concerns, especially when more recent “repair” work has been conducted. Modern, harder mortars used for tuckpointing actually can accelerate the deterioration of the softer masonry on many older buildings.

Roofing. Roofing is a significant operating and capital budget line item for property owners, especially for single-story buildings. Unanticipated—and unbudgeted—roof repairs can arise unexpectedly when leaks occur. Worse yet, unsuccessful repairs may lead to a decision to replace the roof system.

Roof repair or replacement costs can range from $0.50 to $10 or more per square foot, depending on specific roof conditions such as the need to remove existing materials, type and quantity of thermal insulation used, type of roof system to be installed, and ease of roof access.

Replacement costs may increase significantly if roofing felts or mastics contain asbestos, as they do on many older buildings. If the components of the roofing are unknown, owners of older buildings should be prepared to test for asbestos prior to starting any corrective work.

A thorough report should assess the roofing system’s overall condition, including flashings, to determine whether maintenance appears sufficient and to approximate the roof’s remaining life. If ongoing maintenance has been minimal, the report should recommend a good preventive maintenance program, including semiannual inspections to pinpoint minor repairs to avoid more serious damage.

One type of roof system is not appropriate for every building. When replacing a roof, building owners and managers should select materials and methods based on a combination of factors—slope, deck type, flashing conditions, rooftop equipment and related service requirements, building occupancy, and the presence of potential membrane-damaging substances. They also should look for a proven track record that supports the manufacturer’s claims for durability and long life.

HVAC Systems. Greater densities of people and machines may dictate heating, ventilation, and air conditioning (HVAC) system upgrades to provide sufficient cooling. Depending on the type of system in place, increasing the cooling capacity of an existing system can be as nominal as installing additional rooftop units or as significant as upgrading major system components—condensers, chillers, and piping. Structural and electrical systems also may need to be augmented to support additional (or larger) equipment.

Tenants’ demand for improved air quality has serious implications for building managers and owners. If HVAC improvements are required to bring a building up to current market demands, the property condition review should analyze the existing systems’ expansion capability. Improving the air quality is not a simple matter of installing more efficient air filters and increasing the amount of outside air. Increased resistance from improved air filters may translate into the need for increased system capacity. Mechanical systems designed to provide only a certain percentage of outside air also must be expanded to accommodate building users’ requests.

An additional factor in decisions regarding existing HVAC systems is the current phase-out of chlorofluorocarbon (CFC) refrigerants. Building owners either must maintain existing equipment with increasingly expensive CFC refrigerant, modify existing equipment to utilize newer generations of refrigerant, or replace the existing equipment. The age, capacity, and condition of the equipment all must be factored into this decision.

Code and Life Safety
When assessing existing properties, evaluation teams should know the codes in effect when buildings were constructed as well as current codes. When buildings change use or undergo major remodeling, many jurisdictions require that the existing buildings be brought up to meet current code requirements. Building codes affect the following safety systems.

Fire Protection Sprinkler Systems. Throughout the country, developers have been pumping new blood into inner cities by converting industrial buildings into loft apartments or office space. Such a change in occupancy type often dictates the installation of sprinkler systems, an expensive undertaking. Even buildings that have sprinkler systems may need significant reconfiguration to meet the revised head spacing and water flow requirements of the new occupancy type.

Fire-Rated Separation. Building codes require fire separation, such as full height walls and rated door assemblies, between different occupancy types and to protect corridors and other exit routes. Common in existing buildings are areas where properly rated separation was not installed or has been compromised.

Usually related to renovation work performed without proper oversight, these conditions may include extending rated corridors with nonrated walls, adding nonrated doors in existing rated walls, or cutting holes in rated walls to install wiring above ceilings. Installation of wiring is particularly common due to the amount of data and communication wiring that has been added to buildings in recent years. Many of these conditions are not readily apparent but could cause significant liability to an owner in the event of a fire.

ADA. To comply with ADA accessibility guidelines, owners and managers at least must have completed an ADA assessment and have a barrier removal plan, which includes a schedule for performing any required corrective work, in place.

Barriers also must be addressed as part of any renovation work. This is becoming even more imperative now that many states and local jurisdictions are adopting ADA requirements and becoming responsible for their enforcement. In addition, building owners are open to potential liability if life-safety components such as visual alarms are not installed where required.

Environmental. An environmental assessment should be conducted when a property is being sold or prior to renovation of an older building. These assessments generally are performed by a separate environmental consultant (See CIREJ, May/June 1997, “Hiring an Environmental Consultant,” page 16.) For newer properties, this assessment may be limited to a review of documentation regarding the site and potential contamination by previous occupants or nearby facilities. For older buildings, or those in which hazardous materials may have been used or stored, the environmental consultant should perform a detailed on-site assessment, including testing samples. Part of the environmental report should be an analysis of the costs related to both removal and containment of any stringently regulated environmental conditions found, noting the future implications for renovation.

One often overlooked environmental problem is lead paint. Many older buildings, especially those constructed with exposed structural steel, were painted with lead-based primers and paints. When repainting these areas, typically the deteriorated paint must be removed, especially if underlying steel is rusting. If lead paint is to be removed, it must be disposed of in accordance with strict guidelines.

Benefits Owners and managers will find property condition reviews helpful in budgeting for major repairs and creating an ongoing maintenance program. For brokers, property condition reviews can be an integral tool for advising clients on leasing strategies and buy-or-sell possibilities for their real estate portfolios. With detailed information in hand, owners, buyers, sellers, and tenants can make sound decisions.

In addition to the physical review of the property, team members rely significantly on information provided by the property owner, management staff, and tenants, and they indicate that in their reports. The team is not responsible for incorrect information that is provided to it and will report conditions that cause it to question such information. Related liabilities created for the seller or broker are not specifically identified in a typical contract, but should be identified in the sales or financing agreement.