Careful real estate investors get a Commercial Building Inspection or Property Condition Report prior to buying a commercial asset. There are multiple grades of commercial building inspections and there are a lot of different types of professionals performing theses services, all of which are appropriate for one situation or another.
Commercial Building Inspectors and Firms
A few of the classes of professionals that perform commercial building inspections are:
1) Due Diligence Firms. These firms usually call their commercial building inspections Property Condition Assessments or Property Condition Reports. My firm Partner Engineering and Science, Inc. is included in this group. The better of the due diligence firms employ registered engineers and architects and have a specific engineering inspection practice. I am not saying that the best inspectors are necessarily engineers or architects; rather that quality inspectors can work under the responsible charge of an engineer or an architect very effectively.
2) Home inspectors who do commercial too. This group varies widely in my opinion. Some are very good no doubt.
3) Architectural firms. Architects know buildings and building codes well. They are a very good choice when you are planning to do a major renovation after purchasing the building.
4) Structural engineering firms. Structural engineers tend to focus on structural issues as opposed to all building systems, but there are no doubt plenty of structural engineers with broad building systems knowledge.
5) General Contractors. GCs generally know buildings well too. Contractors also run the gamut from very good to less so. A general contractor is great at providing cost data for a renovation, and GCs tend to be a practical group – A GC generally does not want to produce a long narrative report.
As my firm is an engineering due diligence firm, I would recommend the first choice; however, I have seen all five of these types of commercial building inspectors yield high quality work. I have also seen due diligence firms, especially firms that are really environmental firms trying to add this service to their offerings, produce really low quality work.
In a multi-stakeholder environment, the buyer needs a quality Property Condition Report to provide to other members of the capital stack. Generally speaking, the due diligence firms specializing in engineering due diligence provide the strongest reports; and the national firms have a reputation that is very helpful for getting multiple stakeholders to have confidence in the assessment of the building.
Extent of the Commercial Building Inspection
The client should also consider the extent of inspection desired when ordering a commercial building inspection. There are two basic choices: 1) the inspection of all building systems is done by a single knowledgeable building inspector/architect/engineer; or 2) the due diligence firm deploys a team of inspectors including one generalist and several specialists (structural, MEP engineer, elevator inspector, roof inspector, etc.). The second option may cost 5 or 10 times as much as the first general inspection. I do a lot of both types of inspections and believe that both have value, but clearly a team of specialists can do a much more thorough inspection than a single inspector.
Another factor to consider is how much of the property must be inspected. This is especially important in large multi-family properties. We do a lot of Property Condition Reports where we are required to see 10% of units; we also do assessments where we do 100% inspection. One problem with doing less than 100% inspection is that the seller’s property manager usually controls what units we see and the fear is that they may go out of their way to not show us the units with problems.
Limitations to Scope of Work
Most Property Condition Reports are done to the ASTM E2018 Standard for Property Condition Assessments. This standard is a standard for a walk-through inspection and defines as out of scope turning on mechanical equipment (we generally don’t crank up the air conditioning system in the dead of winter). Similarly, invasive testing is out of scope. Most sellers don’t want you coring holes in the roof before you go hard with your deposit–understandable. The take-away from this point is that a Property Condition Report has limitations and is not a warranty. Many conditions are invisible to the inspector. If the buyer is looking for more than a standard walk-through assessment, he should ask and make sure that the seller is okay with the more invasive survey.
I believe that richly scoped Commercial Building Inspection can yield a nice return on investment and I believe that a lot of types of professionals can provide quality consulting services. Each investor needs to determine what is best for them, their lenders, and their partners.