Looking for a better CRE deal? Start by beefing up due diligence

If you've ever been a stakeholder in a commercial real estate transaction, you understand the importance of evaluating a property's physical condition prior to inking a deal. That's because you know that building maintenance represents a significant cost of property ownership, and that undiscovered physical deficiencies can lead to costly problems down the road. But did you know that the most widely used physical due diligence evaluation tool, the ASTM E2018-compliant property condition assessment, is insufficient for all but the most risk tolerant users? Indeed, E2018 is meant to be a baseline standard—the minimum level of due diligence conducted. If you're one of the myriad investors or lenders who have been relying on the standard without modification, you should consider whether you can accept a high level of risk. If not, and you prefer knowing the true costs necessary to remedy a property's physical deficiencies upfront, ask your PCA provider the following questions the next time you're evaluating a deal. What Qualifications Does Your Field Observer Have? PCA preparers are probably the only professional group that does not have a professional organization mandating minimum educational or experience requirements. This ultimately hurts you, the user. Here's why: Over the past few years, PCA providers have faced mounting pressure to keep fees to a minimum, and to stay competitive, many have resorted to using a single field observer to conduct both the PCA and the environmental site assessment required for commercial real estate transactions. Since environmental site assessors' rates are generally lower than those of degreed engineers and architects, they're usually tasked with the job. Unfortunately, many lack the training required to evaluate complex building systems, and due diligence ultimately suffers. The takeaway: When hiring a PCA provider, ask whether the field observer has a four-year degree in engineering or architecture, and whether he or she has appropriate experience and training. Keep in mind that no observer knows the ins and outs of every building component or system, and that a due diligence assessment prepared for a complex asset may require more than one specialist. What Research Do You Conduct? ASTM's PCA standard does not require off-site research, but the information it can yield is often critically important and therefore worth adding. For example, interviews with building service firm personnel, who have a better knowledge of the asset's physical conditions than the field observer (who is usually on site for only a few hours conducting a survey of only those systems and components that are visible and accessible), often reveal useful information about things like historical repairs (frequency and costs), chronic problems, latent deficiencies, code violations, and the like. The takeaway: Request that your field observer interview salient building service firms and disclose the results in the report. Should I conduct additional testing? Non-invasive testing is another item not required under ASTM, but it may be warranted. For example, polybutylene piping is not mentioned in the standard, but it has a history of failing at pipe joints and fittings and is therefore seen as a critical item in conducting a PCA. The takeaway: Many investors and lenders exceed the minimum requirements of E2018, especially if they have been burned. Ask your provider whether any building systems, such as roofing, parking garages, etc., warrant further investigation. How much time do you need to prepare a comprehensive report? A 15-day turnaround used to be the industry norm. Over the last few years, however, client pressure has shrunk that time to five days, even though there is a direct correlation between time expended and the quality of due diligence exercised. The takeaway: Order your PCA as soon as you know you'll need it, and give your provider adequate time to conduct a thorough assessment. Linda Bryson, LEED-AP, is a principal for IVI Assessment Services, Inc. and manager of its due diligence group, White Plains, N.Y.