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 and to help buyers reduce future liabilities and maximize cash flow. Many factors, including the building’s cost, location, age, and prior use, will determine the due diligence studies required. The three applicable to most buildings are:
- A property inspection performed by a licensed Professional Engineer.
- A Phase I Environmental Site Assessment.
- And for buildings valued at $1 million or more, 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:
- Oil tanks or chemical storage bins have been dumped on your site or adjacent sites.
- Your lender might require it, as many lenders do for larger projects.
- Your attorney recommends it because the site or 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 walking around the site to assess the drainage, landscaping, and related issues. If we see signs of possible environmental damage, such as isolated or unexplained areas of dead vegetation, we would recommend an ESA.
An Environmental Site Assessment serves two purposes. First, it identifies environmental risks. No one wants to discover they 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 counters 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 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 data collection and historical information about prior uses and previous environmental problems on the site. We look primarily for issues related to oil spills or leaks from underground tanks that would affect the groundwater. The visual inspection and research focus on both the subject site and the surrounding sites. Environmental problems on other properties can affect their 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 or drilling to find oil or other contaminants. Possibly using a backhoe to dig deeply and extensively on the site. We will 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. Their purpose is to increase cash flow in the early years of ownership. The study documents property asset categories and develops a cost estimate for each item. Owners 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 that building owners can use to finance fit up improvements, marketing, or other necessary expenditures.
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. It notes the areas where future capital repairs will be required. It is not as comprehensive as a PCA, but it provides 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, supporting whatever argument the party paying our bills wants to make. Criterium Engineers provides accurate, objective, and independent analysis of buildings. In this way, our reports and testimony are credible with all parties and with the courts. Depending on what our analysis shows, building owners use it either to support a defect claim or conclude that there is no basis for one. Contractors, similarly, use the analysis to defend themselves if the claim isn’t justified or conclude that the owner has a reasonable likelihood of winning. 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.
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