Due Diligence Inspections – Do You Know What You Need?
We receive inquiries daily from commercial property buyers who are “shopping” for building inspections. The majority of the “shoppers” do not have a clue what they are requesting. We understand small or first time investors may not have the experience or the knowledge to order proper due diligence inspections and we try our best to educate and assist them. What is alarming is the vast number of “professionals” who do not understand due diligence and further, who place minimal emphasis on it for the protection of their clients. The defining standard for a Property Condition Assessment is the ASTM E-2018-15 guideline – yet, many commercial real estate professionals seem to lack an understanding of it.
What is ASTM E2018-15? The American Society of Testing Materials (ASTM) developed a Standard Guide for Property Condition Assessments (PCA) to define good commercial and customary practice for conducting property condition assessments. The guideline is the industry standard adopted by the commercial real estate industry. E2018 outlines a recommended scope of work, procedures, roles of the involved parties and qualifications of the due diligence inspector/consultant. The use of the guideline is recommended by all major lenders as it clearly identifies good procedures for due diligence reporting. Major lenders will almost always require a property condition assessment on “investment grade” real estate. Industrial grade properties may only require ALTA and Phase I Environmental Site Surveys. Investors should carefully evaluate their risk tolerance in considering a PCA on industrial grade properties.
ASTM E2018 also defines inspection procedures for phase inspections of new construction. Standard & Poor’s Guidance Document for Property Condition Assessment also provides an alternate guideline or each may be used in conjunction. It should be noted that S&P insists upon the use of an engineer or architect as the final report reviewer and you should determine if, in fact, your property would require this expense. The engineer or architect rarely conducts the field inspection and the automatic inclusion of this reviewer may only serve to increase the cost without real benefit. Most experienced commercial building inspectors will alert you of any need to have a component evaluated by an outside design professional or trade. As you can easily determine, the requirement for a reviewer of record is desired by large consulting firms who may recommend the S&P protocol for this reason.
The majority of commercial property assessments, prepared by professional consultants, utilize the ASTM E2018 guideline.
What qualifications should the consultant have? Due diligence inspectors typically have a background in commercial building construction along with several years of property inspection experience. Many hold credentials as an ICC Commercial Building Inspector or a General Contractor.
Our firm has a Certified General Contractor, ICC Commercial Building Inspector, ICC ADA Plans Examiner, Certified Safety Professional, Licensed Mold Assessor, Board Certified Indoor Environmental Consultant, Licensed Pest Control Operator, EPA Lead/Asbestos Inspector, NFPA Fire Inspector, HVAC Technician, and Certified Pool Operator on staff. In addition, we are qualified to conduct Phase I Environmental Site Audits.
Some may have experience as a building inspector for a municipality and others may have multiple licenses/credentials in indoor air quality assessment, pest control, HVAC or other trades. Some may have experience as a building inspector for a municipality and others may have multiple licenses/credentials in indoor air quality assessment, pest control, HVAC or other trades. The qualifications of the firm along with their experience level is extremely important for your due diligence protection.
Due to the growth in popularity of home inspections, many home inspectors are promoting commercial building inspections. You should be very careful. Florida does not require any type of license to conduct commercial building inspections so anyone can promote themselves as such. A home inspector license is a poor excuse for knowledge in commercial systems. Many home inspectors are not insured to conduct commercial inspections.
In addition to proven qualifications by accredited organizations such as ASTM, NFPA, ICC, ACAC or state licensure, the firm should have $1 million in Errors & Omissions insurance along with commercial automobile and General Liability.
What type or level of due diligence inspection do I need? This will always depend upon the type and use of the property (office, multi-family, etc.), the size of the facility, the age/condition, the buyer’s risk tolerance, age and type of renovations and the budget allowance.
What is the single biggest mistake Buyers make in hiring a due diligence inspector? Buyer’s fail to determine what their risk tolerance is and therefore they seek an inspector without a clear idea of what level of inspection they need and therefore what level of qualification is needed in an inspector. Whether a seasoned real estate professional or a first time property buyer, we start the process with this question: “How much do you charge for a building inspection?” Although I may expect this from a new buyer, we are constantly amazed by this approach by “seasoned professionals”. I often wonder how they believe they are exercising fiduciary duty to protect their client when, in fact, they are providing the worst level of service.
Although we are privileged to work with some very good commercial brokers, we still encourage buyers to perform their own search for a due diligence inspector. Ask questions, review qualifications and make the best choice for your needs.
Generally, there are three levels of PCA:
- Tier I or Baseline. Often referred to as the Walk-Thru Survey. The inspector will observe the general condition of the property and note general age of major components. The inspector may make recommendations for repairs needed. This is the lowest level of the ASTM inspection. This level should only be used on newer properties or properties with satisfactory maintenance history.
- Tier II. This is a more comprehensive evaluation and would typically include a higher level of investigation. Building components are examined and material deficiencies are identified. This may also include a Cost Reserve or Cost to Cure schedule. Generally, this is the most recommended level of inspection.
- Tier III. This inspection requires a comprehensive inspection of building components and generally would include the provision of experts. An example of this would be an invasive analysis of a roof membrane or a thorough examination of a complex HVAC system. Detailed reports and cost estimates are provided. This level is almost exclusively used in legal claims.
All three tiers may be modified to include specific components as needed. Thus, the buyer may want a Tier I survey of the primary building but request specific emphasis be placed on the roof system.
You understand you need a property condition assessment, but you may not realize you may need more. Depending upon the type of occupancy, some inspections are state mandated but often overlooked.
1. Annual fire door testing.
2. Annual fire main/fire systems inspection.
3. HR7020 balcony/stairwell/railing inspections every three years.
4. Annual backflow prevention testing.
5. Annual inspections of wastewater treatment systems.
6. Inspection of on-site, stormwater systems every five years.
7. Periodic property insurance inspections.
8. Americans With Disabilities Act compliance inspections – do you know if the property is in compliance? The fine starts at $50,000 so now would be a good time to know!
9. Building permit history – do you know if all permits were finaled? You assume ownership of any open/expired/rejected building permits upon acquisition.
10. Asbestos, lead or mold testing.
11. Water testing if on a private well or testing of chillers or indoor fountains for bacteria.
12. Environmental site audits for protection against unknown contamination.
13. Elevator or escalator inspection.
14. Fire inspections.
15. Parking lot and lighting.
16. Commercial loading docks/bays.
17. Emergency generation, chillers, refrigeration.
18. Fuel storage/dispensing systems.
19. Liens or other encumbrances. (Generally tasked to the title attorney).
As you can easily see, there are many external requirements and most Buyers are rarely alerted to them by the Seller or the Realtor. Your due diligence inspector is often your last line of defense against buying an expensive problem. The inspector is also the lowest paid person on your team yet they may very well provide the highest return by alerting you to needed repairs or issues. Trying to find the cheapest inspector is absolutely the biggest mistake you can make.
If you need the services of a reputable, experienced, commercial building inspector in the Orlando or Jacksonville metro market, please contact us to discuss your property. We also conduct due diligence inspections nearly anywhere for high value properties or unique assignments.
Toll free: 855-932-3784