Building Analysis

In certain ways, buildings are like humans. On the outside they can appear perfectly healthy; yet on the inside, their systems can be unhealthy and failing.

 

You should be aware of any unhealthy conditions since major system repairs interrupt normal business operations and dramatically increase real estate costs—two severe threats to profits. To protect profits, it would be wise to ensure any agreement on price and terms is tied to the current condition of the building.

 

Current building condition is so important to valuations and terms that many Wall Street firms, renowned for their financial acumen, hire engineers to assess a building’s condition when considering a long-term lease or purchase. What do Wall Street firms know that many corporate real estate professionals often overlook? They know repair costs can be three times the actual cost to construct the building. Furthermore, they know federal OSHA regulations require employers to provide a safe workplace free from recognized hazards. Thus, to properly protect their profits and their people, these firms go beyond appraisals and hire engineers to perform building condition assessments.

 

Fortunately, because of our engineering capabilities, we provide you with a building condition assessment as part of our building due diligence program.  Equipped with this objective fact-based building information, you can be confident you’re protecting your company or client’s resources and protecting your budget, because you’ll possess the knowledge you need to avoid the major acquisition mistakes discussed below.

Acquisition Mistake

Inaccurate estimate

of operating expenses

Acquisition Mistake

The goodlooking

bad building trap

Acquisition Mistake

Indoor Air Quality:

Can this building

make occupants sick?

Acquisition Mistake

Fire Systems:

Is it the fire or is it the smoke?

Acquisition Mistake

Earthquake Exposure:

Why it's the ultimate risk?

 

Acquisition Mistake

Inaccurate estimate of operating expenses

The Problem

Since real estate costs are comprised of two parts, base rent and operating expenses, it is critical both parts are calculated with precision.  Unfortunately, this is often not the case.  Generally, operating expenses are not carefully scrutinized and are poorly estimated. Why? Because brokers simply take the average of the past three years of operating expenses and use that figure as the future estimate of these costs.

Why is this average of previous costs insufficient? Because it can be wildly inaccurate. There is no guarantee the future three years will mirror the previous three years. Old systems eventually die, and poorly maintained systems can abruptly fail. These system shutdowns often require emergency replacements; which are the most expensive types of operating expenses. Expensive, unplanned, operating expenses make the annual cost of real estate far more costly than expected and budgeted.

 

The Solution

To help you avoid these types of unexpected expense spikes, we provide you with a more precise expense forecast:

  • First, we estimate the future remaining life for the building’s major systems.

  • Second, we estimate the year the system will likely require replacement.

  • Third, we provide the estimated replacement costs for each system.

  • Fourth, we use your company-specific discount rate to discount these future cash outlays to a present value.

  • Finally, we add the present values of both the base rent and operating expenses to provide you with the true cost of the real estate over your specific holding period.

 

As a result, you enjoy a more scientific and a more accurate approach to value: calculations that reveal a lease or building’s true cost. Consequently, you can confidently select the least costly commercial lease or building among your final three choices—thereby reducing your company’s real estate costs.

 

Acquisition Mistake

The goodlooking bad building trap

The ability to rely on durable building systems that function consistently and are properly maintained is essential to a healthy business or investment; consequently, reliability is one of the greatest concerns for tenants and buyers.

The Problem

Unfortunately, buildings can be deceptive. While they may sparkle from the curb, many suffer from defective systems that are near the end of their useful lives or suffer from significant deferred or are poorly maintained.

For example, while on the roof of a building inspecting its HVAC unit, if the HVAC is coughing and wheezing rather than smoothly humming, this suggests the unit is aged and near the end of its useful life or it has been poorly maintained. Either way is it cause for concern.

Tenants and buyers should be concerned when alerted to these conditions because these deficiencies usually result in higher maintenance costs and have a higher risk of unexpected failure. Unexpected failures require emergency replacements—the most expensive and most disruptive type of replacements.

The Solution

To help you avoid additional burdens on your time and to help your company avoid acquiring a defective building, we provide you with the following evaluation of each major building system:

  • Its age

  • Current condition

  • Maintenance practices

  • Remaining useful life and

  • Expected year of replacement

 

Consequently, you have the information needed to secure a building whose interior health matches its exterior appearance, a building with newer systems rather than older systems, a building that is durable and well maintained rather than unreliable and poorly maintained. Most importantly, you avoid the costly goodlooking bad building mistake.

 

Acquisition Mistake

Indoor air quality: Can this building make occupants sick?

Can our buildings make us sick? Actually—yes.

 

The Problem

Sick Building Syndrome, first discovered by California Berkley lab scientists, is a condition where building occupants become ill due to the air conditions they experience at work. The symptoms include relentless migraines, severe flu-like illnesses, and painful respiratory attacks. The causes of these illnesses stem from indoor air pollution, mold, and poor air quality maintenance programs.

 

The Solution

Because of these health risks, during our building due diligence, we look for possible indoor air pollution problems. We investigate whether there are separate air exhausts for copy rooms, janitor’s closets, and any underground parking. We check for potential mold exposure by looking for leaks or other signs of water intrusion. Most importantly, we evaluate the building’s maintenance program because hot water systems, cooling towers, and condensate pans consistently infect building occupants. We analyze these systems maintenance logs to answer these key questions: has maintenance been performed according to manufacturer’s specifications, how frequently are filters being changed, and how often are the air handling components being cleaned.

 

As a result of our building due diligence examination, you will know whether a building’s indoor air quality is safe for occupants or unsafe due to sick building syndrome.

 

Acquisition Mistake

Fire systems: Is it the fire or is it the smoke?

The Problem

According to the National Fire Protection Agency, most fire deaths are not caused by burns, but by smoke inhalation. Often smoke incapacitates so quickly that people are overcome and can’t make it to an otherwise accessible exit.

 

The Solution

Part of our building due diligence includes an examination of the building’s fire safety systems.  We use the latest in fire safety technology to help you evaluate a prospective building’s smoke management and sprinkler systems. Specifically, we look for:

 

  • Smoke detection equipment in the return air ducts as well as in the occupied areas

  • Emergency smoke removal systems in elevator shafts, staircases, and the occupied areas

  • Modern sprinkler systems

 

Consequently, you’ll be confident that you will not make the mistake of leasing or purchasing a building with antiquated life safety systems.  Instead, you’ll be able to focus your search on only those buildings with modern smoke detection and fire suppression systems.

 

Acquisition Mistake

Earthquake exposure: Why it's the ultimate risk.

Of all the desirable building features for businesses and investors, one feature towers above them all: safety. While California is known for its jarring earthquakes, it is also known for having the strongest building codes in the country. Such strong building codes give Californians a false peace of mind and assurance of building safety. Tenants and investors would be wise to accurately assess a building’s vulnerability to earthquake damage.

 

The Problem

Equating today’s strong building codes to a particular building’s safety from earthquake damage is a mistake because numerous commercial buildings suffer from a variety of crippling defects. These defects include outdated building codes, unreinforced concrete walls, and construction along earthquake fault lines. These defects are so severe, the Los Angeles City Council recently passed a costly retrofit ordinance which mandates all defective buildings be upgraded within seven years of the ordinance issue date. Consequently, building safety can’t simply be assumed; to do otherwise jeopardizes peoples’ health.

 

Solution

To help you avoid selecting a defective commercial building, we provide you with an earthquake risk estimate as part of our building due diligence examination. The estimate first evaluates the vulnerability of a building to earthquake damage. Second, it calculates the damage in dollars that a building will experience when a substantial earthquake occurs.

 

With the knowledge gained from this earthquake estimate, you’ll be able to avoid defective buildings which suffer greater risk of crumbling walls, broken gas lines, and the release of toxic airborne smoke and asbestos. Furthermore, you’ll be able to take full advantage of new building technology and recent building codes which better protect your company or investment from economic injury and your colleagues or occupants from physical injury.