What studies do you recommend for conducting “due diligence” on a building purchase? The pre-purchase due diligence process is designed to identify building deficiencies to help buyers reduce future liabilities and maximize cash flow throughout the ownership period. Many factors, including the building’s cost, location, age and prior use, will determine the due diligence studies required. But the basic three, applicable to most buildings, are: A property inspection performed by a licensed, Professional Engineer, accompanied by a Phase I Environmental Site Assessment, and (for buildings valued at $1 million or more) followed by a Cost Segregation Analysis.
How do I know if an Environmental Site Assessment (ESA) is needed for the commercial property I’m purchasing? There are many reasons an ESA might be indicated:
- The most obvious ─ oil tanks or chemical storage bins have been dumped on your site or on sites adjacent to yours.
- Your lender might require it, as many lenders do for larger projects.
- Your attorney might recommend it, because the site itself or the neighborhood has a history of problems with oil spills or chemical leaks, or because you are buying a high-profile property that might be a litigation target.
- The pre-purchase building inspection identifies evidence of potential environmental problems. A Criterium Engineers inspection includes a walk around the site to assess the drainage, landscaping, and related issues. If we see signs of possible environmental damage – isolated and otherwise unexplained areas of dead vegetation, for example ─ we would recommend an ESA.
An Environmental Site Assessment serves two purposes: It identifies environmental risks. No one wants to discover that they have purchased a Superfund site, along with the clean-up obligations and legal liabilities related to it. The second purpose is defensive. In addition to satisfying yourself that the property you are buying is free of environmental risks, an ESA will counter allegations from a future buyer who discovers pollution on the site and accuses you of withholding that information. The study provides an “innocent man” defense. It documents that that you had no reason to suspect environmental problems on the property when you purchased it
What is the difference between a Phase I and a Phase II Environmental Site Assessment? A Phase I assessment is a visual inspection, supplemented by the collection of data and historical information about prior uses and previous environmental problems on the site. We are looking primarily for issues related to oil – spills or leaks from underground tanks that would affect the groundwater. The visual inspection and research will focus on both the subject site and surrounding sites, because environmental problems on other properties could affect its neighbors. A Phase II assessment digs deeper – literally. If our visual inspection or the information we collect identifies the potential for environmental damage, we would suggest a more intensive sub-surface examination. This could include coring to obtain soil samples, drilling to find oil or other contaminants, or even bringing in a backhoe to dig deeply and extensively on the site. We would recommend a Phase II ESA only if the Phase I assessment suggests the need for it.
What information does a cost segregation study provide? Is this study required for all buildings? Cost Segregation Studies are most often conducted on properties valued at more than $1 million in order to increase cash flow in the early years of ownership. The study documents property asset categories and develops a cost estimate on each item. Owners can use this information to support the accelerated depreciation of expenses in the first few years of a property’s life. This accounting strategy delays taxes, generating extra cash building owners can use to finance fit up improvements, marketing, or other necessary expenditures.
Is a Property Condition Assessment needed for all buildings? Is there a smaller scale (and less expensive) alternative for smaller buildings that can’t justify that cost? Smaller properties often do not need the detailed capital repair cost estimates a full Property Condition Assessment (PCA) provides. A limited scope property inspection, performed by a licensed, Professional Engineer, is an affordable alternative. The written inspection report will identify the most significant building deficiencies and note the areas in which future capital repairs will be required. It is not as comprehensive as a PCA, but it will provide essential due diligence information that purchasers need about the properties they are buying.
Can Criterium Engineers provide expert witness testimony in construction defect litigation? We can and we provide this service for both building owners and contractors. This is not to suggest that we are hired guns, willing to support whatever argument the party paying our bills wants to make. On the contrary – Criterium Engineers provides accurate, objective and independent analysis of buildings, giving our reports and our testimony credibility with all parties and with the courts. Depending on what our analysis shows, building owners can use it either to support a defect claim, or to conclude that there is no basis for one. Contractors, similarly, can use the analysis to defend themselves, if the claim isn’t justified, or to conclude that the owner has a reasonable likelihood of winning, if that is what the analysis finds. In many cases, our independent conclusions provide a platform that enables opposing parties to resolve disputes on their own, without the need for litigation, mediation, or arbitration.