COMMERCIAL REAL ESTATE: Property condition reviews reveal much more than meets the eye

When it comes to presenting a property for sale or lease, “a picture is worth a thousand words,” as every commercial real estate professional knows. A professionally-done property condition review, however, can reveal much about a property that could be key when selling, leasing or repositioning a property.

An old property needing repair is a good candidate for a property condition review to anticipate the real cost of acquisition, but even newer buildings can benefit from a professional assessment by revealing hidden conditions requiring costly repairs. Where a property is being repositioned, it could identify code, zoning or law changes that question the viability of the proposed new use, or suggest a different positioning strategy.

In either case, the review can be used as a tool by real estate professionals and their clients to determine the best possible use and cost for a specific property.

What is a property condition review?

Basic property condition reviews assess the building and site to determine what is required to bring the property into compliance with building codes and maintenance standards to make it operationally functional, thus allowing a buyer or seller to realistically assess total costs for the property. A more complete review would go beyond repair and compliance issues, addressing potential uses for the building and testing the compatibility of the existing property with proposed uses.

All reviews include on-site inspection of all building systems (including construction and maintenance records, if available), the building envelope and the general wear and tear of the functional areas. A comprehensive report based on these observations would include:

? Critical repair and maintenance items

? System repairs or replacements for those nearing the end of their lifecycle

? Compliance with building codes, federal requirements and local ordinances

? Upgrades to improve marketability or cost-efficiency

? Changes necessary for a new use

A visual inspection documented with photographs is the first step and is the simplest, most cost-effective way of identifying conditions and deficiencies. Common problems include barrier-free deficiencies, water damage from leaking roofs, skylights and windows, worn out or poorly-maintained heating, air conditioning and ventilation equipment, faulty lighting and wiring, and worn out or poorly-maintained finishes.

Less common problems include structural fatigue or failure, exterior wall system failure and roof fatigue or failure. These are often obvious during a visual inspection, but may require a more comprehensive assessment to determine the scope and cause. If visual inspections can’t determine this, removing brick or other exterior material, cutting holes in gypsum board to see into wall and ceiling cavities, or roofing materials to determine the source of moisture, are all common tests. Destructive testing, however, is done only if major problems are known or are suspected prior to investigation, and where it’s important to know the exact nature and extent of the problem.

For newer or older, well-documented buildings, review of existing documents could reveal problems not apparent through inspection, or the source of an observed problem. These documents should include original construction drawings and specifications and those for subsequent renovations and additions. They include:

-Geotechnical reports

-Building, site, civil and landscape plans and specifications

-Tenant plans and specifications

-Permits, certificates, authorizations and other evidence of code and regulatory compliance

-Property maintenance records

-Reports on facility deficiencies and corrections

-Construction reports prepared by the architects and engineers

-Utility records

Who should be on the review team?

The review should be conducted by people skilled in observing and assessing the physical condition of a property and its major systems. The team is usually comprised of an architect and a mechanical engineer. Additional experts are brought on for major property reviews. In any case, the scope of service required and the personnel employed should be clearly spelled out in the contract.

What should the review cost?

The fee is based on the labor costs plus expenses, contracted as a lump sum or guaranteed maximum cost. A review for a basic property would range in cost from $1,000 to $3,000 for a two-person team taking one to three weeks, with the cost running into tens of thousands of dollars for larger and complex properties requiring large teams up to six weeks to complete.

Fees are paid by the existing property owner if the review is for a property that is not being sold or refinanced. Where the property is being purchased or refinanced, the reviewer is generally hired by the buyer or financier. Other arrangements for payment are possible, as well, depending on the purpose and scope of the report.

Robert S. Dehne, AIA, is president & CEO of GBKB Architects, Inc. at 109 E. Front Street, #303, Traverse City. BIZNEWS