New Building, New Challenges: Due Diligence in Recent Construction

Fri May 17, 2019 at 01:36 PM

With recently constructed buildings, buyers often feel safe with a lower level of due diligence – after all, the building is new! What issues could there possibly be? While the age of a building is an important indicator of its condition, it is not the only factor to consider. The newness of a building means nothing if it is built without proper design and materials, is poorly constructed, or hasn’t received routine maintenance.

Acquisitions of newer properties — those just a few months or a few years old — come with their fair share of challenges, and often the condition of the existing structure and systems are overlooked under the presumption that if it’s new, it must be in good condition. Unfortunately, that is not always the case.

Incorporating an Acquisition Property Condition Assessment (APCA) into your due diligence process for any transaction provides valuable information pertaining to a property’s conditions, repairs, maintenance, and associated costs in the near term and during your hold period. For newly constructed buildings, pairing it with a comprehensive Construction Closeout Report (CCR) also ensures that proper closeout of the construction process was completed and ongoing management and maintenance plans are thoughtfully established.

These more intensive reports can better inform you during your property evaluation and provide confidence that you fully understand the demands and costs to manage it.

 

Customized Solutions for Every Acquisition

In a recent case, a client of EBI Consulting had partnered with a developer in the construction of a 486 unit multifamily property. They owned a percentage stake in the property and were considering buying out the partner’s stake. To determine if this would be in their best interest, they wanted to review the construction closeout process and thoroughly vet the property, even though it was essentially a new building.

As EBI further discussed the opportunity with the client, we recognized their need for a customized solution that could meet their desired goals. Together, a unique project scope was created integrating services from multiple service lines.

 

I: Assessing Client Needs

With every client, EBI’s consultants first work to understand any specific concerns the client may have about the property and what  the client  wants to know and/or accomplish through our investigations. Developing a detailed project scope addressing all client concerns requires collaboration and communication from start to finish, but is most critical in the initial planning phase.

On this particular deal, EBI coordinated a series of preliminary calls so our team of specialists could develop a full understanding of the structure of the deal, the nature of the property, and the client’s specific concerns to develop an agenda of investigations and a final report that would meet their expectations. Through these conversations, EBI determined this project called for a blend of services from two specialty teams within EBI: the Construction Consulting team and the Acquisition Services team.

 

II: Tailored Reporting

With clear client objectives in mind, EBI’s two internal groups developed a customized service offering, including guidance documents and customized checklists outlining the project scope and expectations to ensure clarity and thoroughness, as well as fit for the property and hold strategy.

EBI and the client recognized the importance of getting confirmation that the Architect of Record had certified the building was constructed according to plans and specifications, that the construction contract had been properly closed out, and that all required municipal sign-offs and approvals had been obtained.

The team also recommended a Mechanical, Engineering, and Plumbing (MEP) Survey and an Infrared (IR) Survey of the electrical system.

Following client approval, the EBI team implemented the plan efficiently, gathering all the documents needed for this exhaustive report and timely rolling out the project tasks within the client’s due diligence period.

 

III: Effective Implementation

In conducting site visits and investigations, the EBI team also worked to acquire requisite documents from the developer and collaborated with subcontractors and the municipality to build a “site manual” with all relevant information on the building and systems, including warranties and operation manuals.

This helps ensure property managers have all the documentation they need for ongoing maintenance organized on site. The CCR also included a multi-point checklist outlining the status of various items and documents, including:

  • Certificate of Occupancy
  • Requisite sign-off by the fire marshal
  • Certification of substantial completion from the Architect of Record
  • Sign-offs from all design consultants not included in the Architect’s scope of work
  • Confirmation that copies of all O&Ms and as-built drawings had been transmitted to the property

In addition to the information in the CCR, the client requested an APCR to gain as much information as possible on the property conditions and determine its suitability for investment. The APCR can be a powerful tool in negotiating and budgeting acquisitions.

The report includes detailed information not only on property conditions, but the costs of repairs, maintenance, and determinations of life expectancy and replacement costs of building components.

For the APCR, a team of senior field staff and engineers completed an exhaustive inspection of the site and provided over one hundred pages of detailed analysis of the following components:

Site Conditions

  • Topography
  • Pavement and Parking
  • Landscaping, Site Improvements, and Amenities
  • Municipal Services & Utilities
  • Natural Hazards

Building Systems

  • Building Plumbing
  • HVAC
  • Building Electrical
  • Building and Site Fire and Life Safety
  • Elevators

Building Conditions

  • Substructure
  • Superstructure
  • Facades
  • Roofing
  • Basements/Attics
  • Interior Finishes and Components
  • Suspect Mold and Moisture

Code Violations

  • Building and Planning Department
  • Fire Department

The CCR and Acquisition Property Condition Report provide an extra layer of due diligence to determine the condition of the property and systems and to develop a recommended plan of action to address short- or long-term maintenance issues.

In this case, despite being a new building, EBI did find issues in both the construction and the current condition of the property and was able to report these findings and associated costs to the client. Impressed by our exceptional service and comprehensive reporting, the client has continued to retain EBI for customized reporting.

 

What You Need to Know

While newly constructed buildings may be considered safer investments, there are still opportunities to leverage a meticulous due diligence process. A few key components to remember:

  1. Work with a consultant to assess your needs, customize a scope of work, and tailor reporting to fit your property and unique concerns. Neither you nor your property are one-size-fits-all. An experienced consultant will work to understand your concerns, identify the most likely issues, and recommend the report types that fit your needs. The best consultants maximize the value of the reports to get you the information you need.

  2. Even if you worked with the developer, there is significant value in ensuring proper closeout of the construction process. Adding a comprehensive Construction Closeout Report can keep key property documents organized, ensure proper operation and maintenance, and simplify repairs or renovations. A well-executed CCR gives owners the confidence that they’re prepared with warranty information, crucial certifications, and as-built drawings, and that all is readily available on- site when needed.

  3. More in depth reporting can help you plan for your ownership. Even in new construction, issues may be present. To achieve a thorough understanding of the actual property condition and realistic costs of repair or ongoing management — whether to address issues or regular wear — an APCA can get you the information you need to most effectively plan. Additionally, the completion of an APCA can act as a powerful negotiating tool in a property transfer.

For anyone looking to purchase a property, or with a partial ownership or stake in the property, taking a thorough look at the property can put you in the best position to understand the property’s condition, expected costs of maintenance, and put you in the best negotiating position. For more information on these or other services, visit www.ebiconsulting.com.

 

About the Author:

Frank CookFrank Cook, National Program Director, Construction Services

Frank has over 30 years’ experience providing Construction Services for national and regional lenders, equity investors, and property owners. He has been with EBI since 1997 and completed more than 500 Construction Consulting and Construction Loan Monitoring (CLM) projects. He has managed EBI’s Construction Consulting program since 2005, overseeing a nationwide staff of experienced construction consultants including engineers and architects. His staff consults on an active portfolio of over 120 construction consulting projects.

As National Program Director of Construction Consulting, Frank’s duties include program and  project policy development, technical development, project management, coordination with clients and contractors, and ongoing employee training. Frank’s management has resulted in steady increases in volume while continuing to deliver high quality services and reporting.

 

ABOUT EBI – A TEAM OF DEDICATED EXPERTS

EBI’s Construction Consulting team provides a range of services across existing buildings, new construction, buildings soon to be out of warranty, renovations, property rehabilitation, fire and storm damage repairs, structural evaluations, and property monitoring. The Acquisition Services team assists clients with customized and detailed due diligence investigations of property conditions and analysis of real-world costs of ownership for acquisition stakeholders.

 

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