What to look for when analyzing commercial properties


The decision to purchase and eventually renovate a large commercial building is a difficult and involved decision. Large commercial structures must be carefully evaluated prior to any decision to purchase and renovate, or simply purchase and demolish, for a future new structure. Although the decision is based upon extensive evaluation and financial review, there are several basic parameters that should be evaluated.

1.) As with most real estate decisions, the location of the property is a key parameter to deciding on a purchase. The location far exceeds the condition of the structure as well as the site conditions. If the property is within a popular and successful area for development, whether it is industrial or commercial, the condition of the existing structure is secondary to the location of the property. A reliable and trusted commercial real estate broker should be contacted for information and guidance regarding the location of the property. As in all real estate transactions the location of the property is the key to the success of the re-development.

2.) A cost evaluation of the property and corresponding structures must be conducted. This cost evaluation must include the anticipated cost of renovation of the structure as it exists on the property as well as an overall cost to demolish the existing structure and construct a new building on the property. This cost evaluation should be based on a square foot analysis to demolish, renovate or build new. A trusted local contractor can easily provide these relatively general values to allow an evaluation of the property in terms of demolition or renovation. Obviously the cost of the transaction is only secondary to the location of the property. The hiring of a professional cost estimator at this point in the decision making process will be beneficial to the overall selection of the property and the evaluation of the existing structures.

3.) An environmental investigation of the property must be conducted to determine the cost of remediation, if required, of the existing structure and property. The cost of remediation of existing locations has become an important financial aspect of any purchase regarding existing properties. The environmental impact of existing sites has become a very important aspect of any commercial property or multi residential property purchase. Due to the lack of environmental diligence in the past, sites that become available, are more than likely contaminated, and in need of substantial financial funding for environmental cleanup. It has become extremely difficult to find properties that do not require some type of environmental cleanup or remediation.

4.) The possibility of land capping, if the site is substantially contaminated, can be evaluated for cost and approval. Although this process can take substantial time and effort in seeking approvals, the efforts can be rewarded by an initial low value for the land. The remediation in most cases will be costly, but it may result in a usable property that can support substantial development. Environmental concerns resulting in land capping has become a common method of establishing usable parcels for re-development.

5.) If the existing site and structures will have new construction added to the existing layouts, then a site analysis ,including test borings should be conducted. Test borings will determine the elevation of the water table as well as the presence of any hidden layers of peat or clay. In addition the elevation of bedrock can also be determined with site borings, which will allow a more accurate estimate of cost for any new construction. The cost of site borings on the property will offer substantial cost economy when the site is being priced and the designers of the property are aware of rock locations as well as problematic site conditions such as clay or silt.

6.) Depending on the determination of either renovation, new construction, or a combination of both, a financial estimate for all aspects of the work should be performed. This financial estimate should anticipate the time schedule for the purchase of the property, the demolition involved, the new construction, as well as any renovation of the existing structures. Cost needs to be a primary factor in the decision to purchase the property.

7.) If the existing structure is to remain, there are specific parameters that will need to be evaluated, priced and either replaced or renovated. Some of the primary considerations regarding the existing building are;

a.) Existing structure. A structural engineer should be hired to evaluate the structural integrity of the building. The age of the structure as well as its structural components are important to the overall condition and life span of the structure. If the structural elements are substantially compromised, the demolition of the structure could be financially more feasible and economic. To recondition, replace or reinforce existing structural elements, dependent upon their condition, and what they are constructed of, can cost as much as a new structure. It is important that a competent structural engineer examine the conditions and together with a cost estimator, determine the scope of the work as well as the cost. In this manner, the owner can financially evaluate the project and make informed decisions.

b.) Existing mechanical and electrical systems. A mechanical and electrical engineer should be hired to evaluate all the existing systems of the structure. Depending on the use of the existing structure, the mechanical and electrical systems may not have the capacity or the proper design layout to service the new anticipated use of the structure. It is extremely important that a professional engineer, together with a cost estimator, evaluate the systems of the existing structure to determine the scope of repair, replacement or support of the existing systems as well as the cost.

c.) Life Safety issue. Such items as sprinklers, fire alarm, exiting routes, stairways and other life safety features of the existing structure must be evaluated. The importance of the sprinkler systems ability to service the new use of the structure, as well as the ability of the existing fire alarm service to function in accordance with the latest code as well as service the new use of the building, is extremely important. Substantial money can be lost if the owner is not aware of required upgrades to both systems. The use of the structures needs to be considered, the age of the systems, as well as the upgraded requirements of the new life safety codes, will all effect the cost of providing the upgrades for both the sprinkler systems as well as the fire alarm systems.

d.) Roof and weather protection. A new roof, as well as windows, doors, caulking, etc. can always be installed in an existing building. The important aspect of the roof and weather protection of the existing building is the maintenance of these elements during the use of the building prior to the renovation.   Water can literally destroy a structure, and if water has been allowed to enter the existing structure for any length of time, there could be substantial damage to the building. An expert in restoration should be hired to evaluate the amount of water damage, mold development and other deterioration aspects of water penetration that has occurred in the existing structure.

e.) Windows and doors . These elements of a structure can be easily replaced with more efficient units. However, the cost of replacement must be evaluated and added to the financial burden of purchasing the existing property. If the property is to be a multi residential development and the replacement of hundreds of windows is required, this will add a large cost to the renovation and future use of the building. Once again, the employment of a professional cost engineer and architect should be considered to develop the most accurate construction estimate for window and door replacement.

Once all the aspects of the potential project are identified and researched, the financial impact of the new use anticipated for the buildings can be determined. Upon summary of the financial impact of providing a project, consistent with the operational needs of the new use, is clearly understood, there will be a number of considerations to be discussed and decided upon.

1.) How much of the existing structures will be renovated and reused. This will be determined by their condition as well as the cost of rehabilitation as opposed to constructing a new structure.

2.) Based upon the use, what type of construction will be used to build the new additions, buildings, etc that will be required to satisfy the new usage of the space. Although the initial cost estimates will assume a type of construction, now is the time to generate the actual documents for the construction.

3.) Once the building sequence is established, how long will the actual construction require? This becomes important due to the financial impact on the construction loans, the construction insurances as well as the soft costs for all the professional consultants required to properly construct the buildings.

4.) What conditions and construction requirements will need to be added to the construction contracts to enable the owner of the property to achieve the best financial success. Each individual project will have customization of construction contract requirements specific to the individual project. Some projects may require special insurance or even special security clearances, depending upon the project as well as the location.

5.) Is there are phasing potential on the project, that would allow the construction and or renovation to be phased to allow the owner usage of the property earlier than total completion. The actual construction schedule will need to be evaluated to allow the proper sequencing of the construction work. Possible scenarios that would allow the owner occupancy earlier than full completion, may allow the owner to start receiving rent or payback on the investment, earlier than expected.

6.) What aspects of the project are required first. Are there certain structures that should be scheduled for completion prior to others? Are there utility structures or utility installations that should be completed first to allow the project to flow more efficiently or economically.

7.) Will the project benefit with a total union project, open shop or a special project agreement that would allow all available labor to participate. How many tradesman will be required to complete the project within the projected schedule. These types of concerns and decisions will need to be discussed and decided upon.

8.) Does the project require any formal Federal regulations such as the Davis Bacon act? In many instances if the money is being lent from a governmental agency or the project is a State or Federal project, the project might need to follow certain special legal parameters. All of these issues should be evaluated prior to the start of construction.

9.) What hazardous remediation will be required prior to general construction start? Although the environmental impact of the project was reviewed and analyzed prior to the decision to move forward, the actual processing of these requirements is needed prior to actual construction. Action must occur prior to the start of the construction phase.

10.) Is the project tax exempt for any reason, if so, obtain the tax exempt certificate for distribution. Certain projects have different tax requirements. Obviously this must be analyzed and placed into effect prior to the start of construction.

11.) When is the earliest date that a tenant can enter the project for their work letter construction. The work letter is all the interior work that a specific client needs. Many times the contractor performing the overall project is the contractor of choice for the work letter scope. In other cases, the individual tenants are allowed to contract with whoever they want. The work letter scope needs to be included in the overall schedule to accurately determine when the owner will be receiving lease payments for the space.

12.) How will the work letter scope of work be accomplished. Will the general contractor complete all the tenants work, or will individual contractors be allowed to participate in the work letter scope of work. This is important due to the scheduling requirements of the general contractor and anticipation of manpower requirements. If the general contractor is responsible for all the work letter scopes, then they need to anticipate the men required to perform this work.

13.) What is the early finish date and the latest finish date that can be tolerated, financially by the owner. This is based upon cash flow and the ability of the owner to finance the project. Most projects have no payback until tenants are established in the buildings. This date is usually very important to the owner of the project.

This summary of activities, relative to the selection of a commercial structure and property, is certainly brief and extremely elementary Commercial developers all over the world entertain thousands of properties and structures for demolition and renovation. I am sure that there exists several summary lists of requirements, concepts and issues that all developers must identify, prior to making a professional judgment on a piece of property as well as existing structures.

This brief summary is only meant to address the basic principles of looking at commercial properties, and is not intended to be a total guide to the selection. The principles are the same for all properties. It is important that the location makes sense, the site is verified for remediation and hazardous waste issues, and the structures are in a condition that is relative to the financial budget to be expended. In addition the ability to expand the development in the future may also be a primary consideration, or if located within a small populated area, the significance of this area and location may be incentive enough to construct only what can fit on the site.

Commercial development and speculation is a very intriguing method of making money. However the amount of skill required to properly perform this method of development is great, yet the paybacks are substantial, if the selection process follows a systematic, well managed routine of investigations and research.

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