Balancing Act: Lack of New Commercial Space Overcomes Softening Demand

This system is often referred to as the HVAC system, short for Heating, Venting and Air-conditioning.  Here are some of my thoughts on the subject.

The HVAC system, in any commercial building, is the one system out of all the major systems, namely: electrical, plumbing, HVAC, roofing and structure, that requires the most maintenance.  This is because it is the one system with numerous moving parts.  All the other systems either work or they don’t for the most part.  They either keep the water out, the lights work, the toilet flushes or it doesn’t.  With the HVAC it might work but, not well enough.  It might come on but it doesn’t cool off the back office.  It heats up but not very fast.  Or it just doesn’t come on at all. 

With the exception of the roofing, the HVAC system is also the one system that has the shortest expected life of all the systems.  Both systems, the HVAC system and the roofing system have typical expected useful lives of approximately 15 – 20 years depending on the type and style along with how well they are maintained for commercial applications. 

The most extreme example I have seen of an HVAC system going well past its expected useful life was in a downtown Los Angeles office building that was built in 1953.  It still had the original system functioning, and functioning well I might add, in 2008!!  That is 55 years for a system with an expected useful life of far less than half of that.  I know they used to build them better but this was amazing in anyone’s book!  I soon found out why it lasted so long.

I had been called out to do an evaluation on this 173,000 sq. ft. building to determine if it needed to be torn down or if it could be saved and renovated.  To get a feel for the building I was getting a tour by the only maintenance technician.  (A building this size usually has at the very least two, if not three, full time maintenance personnel.)  He was from Greece and took great pride in his building.  He knew it from top to bottom.  While we are walking I noticed him glance over at a pressure gauge system on one of the heating units and very quickly reach down and adjust a couple of valves.  He then proceeded to keep walking and I asked him what he had just done.  He told me when that one gauge gets over a certain amount he needed to make an adjustment so that it wouldn’t overheat.  I was amazed.  You have to realize this thing looked like something out of a Rube Goldberg drawing.  Piping, and valves and dials and gauges and wires and all sorts of mechanical “stuff” all over the place the size of a large living room two stories tall with “rooms” off to the side for other mechanical “things” that this type of system does.   The whole point here is that nobody but this maintenance guy knew how to keep the whole system functioning properly.   This building is over 170,000 sq. ft!    A system to handle this size is a minimum of $500,000 to replace!!  It could easily go twice that.  He also showed me how, by adjusting a couple of valves, he had saved the building over $6,000/month!  

What this illustrates is the vital importance of proper maintenance. Unfortunately, this type of hands on maintenance is almost unheard of in this day and age.  This is one of the reasons that systems only have a 15 – 20 year expected life in them.  He mentioned to me that some of his buddies, who keep other older buildings going in Los Angeles, all have HVAC systems over 40 years old and laugh when told they need replacement due to age.  They know better.

Procedure write-ups and maintenance logbooks are two of the most needed and neglected aspects for maintaining any building.  Things like: clean out the roof drain every fall before the rains so it doesn’t overflow into the bookkeeper’s office, etc.  Every building has a few of these really important maintenance actions that if done will save all sorts of time, money and aggravation. 

On the flip side, our company just did an inspection on a brand new building over 300,000 sq. ft. in Los Angeles.  It has an HVAC system that was “fully” automated with remote sensors and a remote monitoring system to make repairs or shut down the system automatically if there was danger of causing damage.  All this system needed was a phone line connection.  It was amazing.  We brought in a specialist in not only this type of sophisticated state of the art HVAC system but very savvy with computers and this particular soft ware so he could demonstrate that the system really could be operated from a remote computer and the remote system could properly monitor all aspects of the entire HVAC system and make adjustments as called for.   The procedure manual for the proper maintenance and operation for this place was a large book by the way!  This system called for at least a 16 hour instruction course in how to operate it at the building.  (Automatic, yea right!)  The pressure levels at the pumps need to be___ and the water treatment systems needs___ so that you don’t have to replace a $50,000 part and it needs to be looked at every week, at least, and on and on and on.

Most of the HVAC systems manufacturers have tried to minimize the maintenance needed.  However, every system still requires maintenance on a regular basis.  If kept up the system will last usually well past its expected useful life.

1. Not getting a professional inspection done on the property BEFORE you buy it. If you don’t know exactly what you are buying then you don’t know what needs to be done immediately, what needs further investigation or what the costs to repair will be. This could be as simple as debris on the roof which will block drainage. To the untrained eye this could appear to be insignificant. True story – we told the buyer there was debris on the roof which was clogging the drains. They did not get it removed. A heavy rain flooded the roof which then collapsed and caused many thousands of dollars in damage.

We sometimes hear buyers say they don’t need an inspection “because the building is new”. We have seen expensive-to-remedy flaws even in brand new buildings.

2. Not having a qualified realtor help you through the process. I was on a site doing an inspection and found out my client did not have a realtor. When I asked him what he was going to use the site for I found out they were planning a major conversion to put in a restaurant. I asked him if that was permitted at this location and it turned out that he had no idea that some areas did not allow restaurants due to zoning restrictions or lack of parking. These are the things a qualified realtor knows and can save you untold time, heartache and money.

3. Not getting the parking area resealed on a regular basis. Another true story: the asphalt parking area was left unsealed for over ten years and was now crumbling. Had the area been sealed at a cost of roughly $1,000 about every 5-7 years, the savings would have been approximately $10,000. The cost to reseal is about $.10 – .20 per sq. ft. The cost to resurface once it is allowed to start falling apart is approximately $1.50 – $2.00 per sq. ft.

4. Not having the HVAC system regularly serviced. I was inspecting a roof mounted system where the owner decided that instead of changing out the filters on a regular basis, he would just not put any filters in the units. This will save money right? Wrong! It actually caused the internal workings to get dirty and this caused the units to operate very inefficiently to the point that they began to break down. The cost of a filter is usually less than $10 for a very good filter. Had these filters been changed regularly it would have saved many thousands of dollars.

5. Lack of maintenance for the building exterior. Many, many times I see wooden trim, such as at the roof edges or on the sides of the building that had not been touched up over the years. The resulting damage costs many thousands of dollars to remedy. Another example is failing to have the decks sealed when there is a sign of wear or when cracks develop. This mainly occurs with apartment buildings. Again, as in example 3 above, sealing the decks is usually less than 1/10th the cost of having the surface redone.

6. Not having an internal camera inspection of the plumbing waste system when advised to do so by the inspector.

Another true story: I did an inspection on an older, multi building site and had recommended a camera inspection of the waste system. This was a manufacturing site and it was not known what had been poured down the waste lines throughout the years. An internal camera inspection was the only way to determine what shape they were in. The buyer decided he did not want to spend the $300 – $500 it would take to do this. He moved into the vacant buildings and within 30 days all his waste lines began backing up. He then had the camera inspection done and found out this site was not even linked to the city sewer but had a large underground waste tank on the site which was no longer permitted. This cost him $35,000.00 to fix properly.

The most costly mistake made by any commercial, industrial or multi-family buyer is not performing thorough due diligence. Use a qualified realtor and get a professional inspection. Lastly, listen to them and take their advice! After all, they are here to help and protect you.

Bob Pace
Commercial Real Estate Inspectors, LLC

At first glance, this may seem to be a bit technical but bear with me and I’ll attempt to break it down so that it can be easily understood.

Per Wikipedia:

“ASTM International (ASTM), originally known as the American Society for Testing and Materials, is an international standards organization that develops and publishes voluntary consensus technical standards for a wide range of materials, products, systems, and services.

ASTM supports thousands of volunteer technical committees, which draw their members from around the world and collectively develop and maintain more than 12,000 standards. Anything from plastics, solar, metals, medical devices, paint, general methods and instrumentation, etc……..”

“One of the standards that ASTM has compiled is the Property Condition Assessment or PCA for short. The actual ASTM name is E2018.

Purpose of ASTM E 2018 is “to determine the base line, or minimum level, for a Property Condition Assessment in the United States for commercial real estate.”

The complete standard is roughly 25 pages long with many references as to how to conduct a real estate inspection of a commercial piece of property.

The guideline for the E 2018 describes a property condition assessment as “the process by which a person or entity observes a property, interviews sources, and reviews available documentation for the purpose of developing an opinion and preparing a PCR (Property Condition Report) of a commercial real estate’s current physical condition. At the option of the user, a PCA may include a higher level of inquiry and due diligence than the baseline scope described within this guide or, at the user’s option, it may include a lower level of inquiry or due diligence than the baseline scope described in this guide.”

Let’s define what is meant by “baseline” according to the guide: “the minimum level of observations, due diligence, inquiry/research, documentation review, and preparation of opinions of probable costs to remedy material physical deficiencies for conducting a PCA as described in this guide.”

It should be understood that concealed physical deficiencies are excluded in PCA’s and they are not generally technically exhaustive. This means that what the inspector can’t see is not included in the PCA and the use of instruments, testing, calculations, exploratory probing of the property, etc., is not generally part of a PCA. This is because the cost and time involved in gathering this information may far outweigh the value of the information to the customer.

It is important to understand that the ASTM E 2018 is a guideline is for voluntary use by parties who desire to obtain a baseline PCA of commercial real estate. As is made clear by the above reference, the scope of the PCA is up to the user and can range from a baseline assessment of the property to much greater, in depth investigation of the property by various experts. In other words, it’s the customer’s choice as to the overall scope of the PCA based on their requirements and what purpose the PCA is to serve. A professional inspector can help determine the scope needed for the customer’s particular needs.

I personally advise anyone who is going to have a commercial piece of real estate inspected ensure that these standards are used. This will give you virtually all the basic information needed to make an educated decision.

Aside from the standards being followed, the most important aspect to any real estate inspection is who you hire to do the looking. How much judgment does he/she have as to the importance of what he finds? Do they know how to communicate findings in a way that is useful to you or your client?

As Commercial Real Estate Inspectors, we have 15 years experience delivering real estate inspections. Our unique RISK Assessment™ adheres to the ASTM E2018 standard and fits almost every buyer’s needs. We can also expand it to include any detail required.

Call us TODAY at 818- 957-4654 and set up your next inspection!

Hope this helps!

—Bob Pace

Molds are fungi. Fungi include mildews, molds, mushrooms, rusts, smuts, and yeasts. Without them we would not have, wines, cheese, bread and some of our medicines such as penicillin.
Molds require moisture, something to eat – which is something organic such as dust or skin flakes – and the proper temperature – in Southern California that is almost all the time. In ideal conditions, molds can grow in less than 48 hours to the point of being visible.

After extensive research and personally inspecting thousands of homes and commercial buildings over the last fifteen years I have found that mold really is a potential concern; a much bigger concern for some people than others.

Some people are affected adversely by the same amount of mold that doesn’t affect the person next to them in the least. Molds affect each person differently. The people who are the most susceptible to being affected by molds are the very young, the very old or those whose immune system is compromised for any reason such as chemo therapy or the flu or people with specific allergies to mold.

Per Wikipedia:
Molds are ubiquitous in nature, and mold spores are a common component of household and workplace dust. However, when mold spores are present in large quantities, they can present a health hazard to humans, potentially causing allergic reactions and respiratory problems.

Some molds also produce mycotoxins that can pose serious health risks to humans and animals. Exposure to high levels of mycotoxins can lead to neurological problems and in some cases death. Prolonged exposure, e.g. daily workplace exposure, can be particularly harmful. The term toxic mold refers to molds that produce mycotoxins, such as Stachybotrys chartarum, and not to all molds in general.

At Commercial Real Estate Inspectors we look for mold at all inspections. It is most often seen in the bathrooms in the grout, between the tiles in walls and the tub or shower. Also, exterior areas which have not been properly sealed, such as around windows and doors, allow moisture intrusion into the walls and ceilings.

Having each apartment checked for mold is a very important and cost effective part of any inspection of Multi-Family properties.
We did an inspection of a Multi-Family building wherein our client had us do only a representative sampling of the units; about 20% of the total. I advised him to have every unit inspected but the client felt he wanted to “save money” by not paying us to look at every unit. As it turned out, one of the units we did not inspect had mold issues and the repairs are going to cost over 10X the total price to have us inspect every unit! Not a very cost effective decision in the end.

When you hire Commercial Real Estate Inspectors, we inspect all the systems in the building, check for mold and provide you with our unique RISK Assessment® report so you know what repairs and upgrades will cost per industry standards. That way you and your agent can make an informed decision.

Mold is everywhere. It can grow rapidly, can greatly affect some people even with very little exposure AND it can be costly to repair.

Call us TODAY and book your next inspection!

I hope this helps.

—Bob Pace

At first I used to take this kind of thing personally. I have always been very conscious of how I communicated.

I have felt for many years that it really isnt what you say it is how you say it. I try very hard to deliver what I say in a gentle manner. That does not mean I dont let them know what I find but I dont have to say it with negative adjectives such as, Boy, that was one of the worst electrical systems I have every seen! Or, If that roof doesnt leak at the first sign of rain I would be shocked or anything of the sort.

If the roof is worn and aged and at or near the end of its expected useful life than so be it. I do not have to go into saying it is terrible or how bad or poorly maintained. The difference between the two is something that can color the report and give my client the impression the seller is not a good person or in some way negligent. These may be the case but it is not my job to make that judgment.

I feel very strongly that my job is not to find out what is wrong with the properly but to find out what is. There is a big difference. There are always aspects of any site that are positive. By not having any vested interest or hidden agenda. In other words because I never do any work on any properties I inspect I really dont care what shape it is in. I only do inspections. I dont have any coloring of my judgment as to the condition of a particular system or the site. If something is serviceable and doing the job it was intended to do then it is.

I feel one of the biggest aspects to property inspections is to convey the information in a nonalarming manner. I also feel strongly it is also my job to ensure that the client understands how much longer a particular system will last per industry standards with routine maintenance and to also understand if that building system needs immediate repairs or maintenance.

I have found after many years of experience as a general contractor and having worked on hundreds of construction projects that unless you plan to violate the laws of the physical universe, such as making something levitate, that anything can be fixed. When I look at things from that viewpoint then I dont get emotional or judgmental with my findings. If the roof is old and worn out and in need of replacement then so be it. It will cost so much and then you have a new roof and you wont have to worry for many years.

In todays market in the Los Angeles area most commercial properties are well over one million dollars. When I look at the systems, unless there are major structural issues even if the electrical, plumbing, heating and AC and the roofing all need to be replaced, which is very rare, the cost to replace all are almost never over 10% of the total cost of the transaction.

This means that even if all the major systems, other than the structure, need complete replacement you could, for less than 10% of the total cost of the building have a completely new building other than cosmetics.

I try to look at things for a solution standpoint. Things can be fixed. Stuff wears out. Life happens. Just keep things maintained, repair them when things break down and realize systems have an expected useful life. If well maintained they will last past that time frame usually but eventually mechanical systems wear out and need complete replacement. It is just the way life is. What ever it is it can be solved if you confront it with intelligence. .

I hope you found this informative and of use.

—Bob Pace

In commercial sites, chemicals have often been poured down the lines that can cause deterioration at an advanced rate.

Problems can also arise when the building or site has been vacant for any length of time. This can be an issue due to the lack of flowing water. Sometimes the constant flow of water keeps things moving and no apparent issues surface. The lack of flowing water can allow sediment to solidify and cause backups. It also allows fine roots that may normally be knocked off by the flowing water to grow and become obstructions.

Just the change of use for a site can cause issues. The new owner is using the underground system in different ways than the old owner.

Here is an example that illustrates why, when we tell you to have a professional sewer line check done, we mean it:

I recently got a call from a client who is having extreme “issues” with his underground sewer line system. It was backing up into the interior courtyard of the complex of buildings he purchased. He had bought the property back in January but had just moved in. The past owner was slowly moving over into his new facility and had been using this one the last few months for storage only. The site was originally built in the early 1950’s. This means the sewer lines are almost 60 years old. The average useful life of cast iron sewer lines is roughly 40– 80 years depending on the material used, who made it and what has been poured down the lines.

He had experts come out to determine what the cause of the back up was. After extensive investigation it was determined that the system was improperly installed originally and it was going to cost 10’s of thousands of dollars to fix. The previous owner claims no knowledge of this problem. He may very well have not known of any problem or any unusual condition. The system apparently worked for many years.

I asked my client if he had the sewer-line internal camera work done as I had recommended in my original inspection report. He rather sheepishly said he had not.

Following our advice to do so would have been very cheap insurance. The risk/reward ratio is so high that these inspections are obviously money very well spent whether this is a commercial site or a multi-family site. The amount of potential grief and agony this can save you is amazing.

We may recommend this type of inspection even for new buildings. The reason is because many times there was an old building on the site that was torn down and the new hookups are put into the old lines, whether intentional or not.

Another reason we recommend new lines are looked at is because we, in California are in earthquake country and it does not take much movement to separate a line underground. Also new buildings settle and even a small amount of settlement can disrupt the connections underground. You won’t ever know this happened unless it gets checked out professionally.

At Commercial Real Estate Inspectors, our professionals and unique RISK Assessment℠ will help you understand the condition of your property BEFORE you purchase it.

Call us TODAY and book your next inspection!

I hope you found this informative and of use.

—Bob Pace

The simple answer is yes you do need an inspection. A bit of education is needed here.

Per Wikapedia – A triple net lease: (Net-Net-Net or NNN) is a lease agreement on a property where the tenant or lessee agrees to pay all real estate taxes, building insurance, and maintenance (the three ‘Nets’) on the property in addition to any normal fees that are expected under the agreement (rent, etc.). In such a lease, the tenant or lessee is responsible for all costs associated with repairs or replacement of the structural building elements of the property.

The precise items that are to be paid by the tenant are usually specified in a written lease.

These are very basic definitions and there are many aspects or variables to each one, however, I feel you do need an inspection by an unbiased 3rd party and here is why:

1. If you are getting into a triple net lease they usually run 5 years or more. You will be responsible for the above listed items. What condition are they in now? What should I expect over the next five years maintenance-wise? Maintenance can be anything from paint to roofing and everything in between. Read the contract carefully and get any questions answered so you fully understand your responsibilities.

2. If you are at the end of your lease what are your responsibilities? What items exhibit typical wear and tear and which are past that point. A good thorough general inspection will help you understand what condition your site is really in and what areas you will most likely to be responsible for.

3. If you are in an extended lease it is a good idea to get a good thorough general inspection every 5 years so you know how things are holding up and what preventative maintenance is needed now or in the near future to help prevent or at least minimize future repairs or replacements.

In my over 30 years of experience good routine maintenance is the most important and beneficial thing that can be done to minimize unexpected expenses.

I recently did a lease inspection for the owner of a property that was going to be taking back possession of a large warehouse & office space from a tenant who had been there for almost 30 years. Very little maintenance had been done. The lessee was now most likely going to be hit with a large bill. Many thousands of dollars could have been saved with a good routine maintenance program.

One example of how this tenant could have saved a lot of money is the parking lot. It was very weathered and worn. It had not had any maintenance for approximately 10 years. It was to the point that it really needed to be resurfaced. The cost difference between resurfacing and resealing is $.20 per sq. ft. to reseal and $2.00 per sq. ft. to resurface. This is 10X!!. Resealing is needed every 5 – 7 years for this type of facility and if done the surface will last almost indefinitely. In this circumstance there was approximately 10,000 sq. ft. of parking lot to be redone. This is a difference of $2,000 vs $20,000. That is just one area.

Get a good thorough general visual inspection before you get into a triple net lease. Get a good general physical inspection every five years and have a good overall maintenance program and you will save a lot of money, not to mention minimize the unexpected unpleasant surprises such as roof leaks and the AC going out at the most inopportune time. From my experience a good thorough general visual inspection will usually save at least 10X the cost of the inspection.

I hope you found this informative and of use.

—Bob Pace

Here are my answers:

1. Maintenance
2. Timely maintenance.
3. Properly done maintenance.
4. Maintenance done in the correct sequence.

What I am talking about here has to do with annual maintenance inspections and how they actually save you or your client money. I have been contacted in the last six months by some very large corporations, each with millions of square feet of properties and hundreds of buildings, all wanting to have annual maintenance inspections.

Although many of our inspections occur during the sale of commercial real estate or for triple net leases, the climate has changed. As we all know, sales have suffered greatly over the last 18 months in the commercial real estate market. Most of the inspections we are doing currently are cash sales. More people, for various reasons, are keeping their properties longer than ever before. They need to protect their investments. They need to have someone who has no vested interest look at what they have and determine how to keep their investment in the best shape possible for the least amount of money and for the longest amount of time. What do I mean by vested interest? In this case, I mean someone who stands to gain from what they find.

The concept is to have someone who has no vested interest look over the building(s) and give an unbiased report of:

1. The expected useful life left in that system, such as the plumbing, electrical, structural, heating and AC, roofing and grounds.
2. What immediate repairs or further investigation is needed for that system.
3. What you should expect to pay to keep that system properly maintained over the next five years.
4. What condition that system is really in right now.
5. Is the responsible party for the upkeep and maintenance of the site doing their job and are they reporting it accurately?

The companies I mentioned earlier were getting reports of what was being done from a maintenance aspect but they had no idea if these reports were true because the people giving them the data had a vested interest they were companies who actually do the repair or construction work themselves after they provide a sometimes free inspection of the property. In short, the actual service their company sells is not property inspections, repairs/construction. What they need is a professional with no vested interest to give them an unbiased report including a list of what to do and how much these things are going to cost. Your inspector should be someone other than the guy who does the work.

With annual maintenance inspections you find out what condition the site is in, what is being done and how much things are going to cost. Now that the initial inspection has been done by an unbiased party you can get annual updates to determine if the recommended maintenance is being done and if so, if it is being done properly. The only way to know these is to have them looked at by someone who has no vested interest in whether or not what they see is good, bad or indifferent.

As I have said before, after many, many years in the construction trades and over 6000 physical inspections, I have come across a few pieces of wisdom. One of the most significant has to do with how much money is actually saved with proper maintenance. The statement of an ounce of prevention is worth a pound of cure has never been truer.

Have an annual maintenance inspection done, do the recommended items in a professional manner and do them when they are needed. If you do this you can expect your property to last longer than most, cost less in the long run and be worth far more when you do sell it in the future.

I hope you found this informative and of use.

—Bob Pace

In its simplest terms a Phase 1 is a site visit and document review of the surrounding area to determine if further investigation is advised from an environmental stand point.

A Phase 1 inspection is a review of local governmental documents regarding the site to determine what the past usage of the site was along with extensive document review of the surrounding area. It also entails a very involved and detailed site visit by a qualified professional. In addition there is data base information that is gathered and reviewed of the surrounding vicinity to determine if there is a potential risk from an environmental stand point in the immediate area.

These potential risks can be anything from a past gas station on or near the site that might have contaminated the ground water to there having been a dry cleaner on the site that might have spilled chemicals into the ground. There could have been past dumping on the site or an auto repair that did not handle the oils properly, lead in the paint, asbestos, and on and on.

I think you get the picture. The focus of a Phase 1 inspection is environmental not the structure or any of the systems of the building. The systems are the focus of the general visual inspection. They are two separate areas of responsibility. Both are important. Many lending institutions require a Phase 1 clearance before they will lend money.

A Phase 1 inspection is an integral part to many commercial and industrial real estate transactions. One bank that I know of will not lend for any commercial or industrial transaction on real estate over 1.5 million dollars without a Phase I. We are hard pressed to buy anything in the Los Angeles area in the commercial or industrial real estate area for under that.

There are two other aspects to a Phase 1 that may come into play depending on what is found during the Phase 1 inspection and research. These are Phase 2 and Phase 3. As you might assume Phase 2 and Phase 3 are the more involved aspects of the environmental field. Phase 2 involves testing of the site such as coring into the earth and taking samples of the soil along with testing it to determine what is in the soil. The information during a Phase 2 will determine if the site warrants further investigation and/or to be remediated. If remediation is needed this is Phase 3.

Each environmental Phase whether it is Phase 1, 2 or 3, has a very involved set of industry standard requirements. Each requires highly trained professionals to do properly. This is not an area to skimp on. Have a reliable company with vast experience do your Phase 1 inspection. Getting the cheapest deal for something this important I feel could easily be fiscally irresponsible. A properly done Phase 1 inspection really is for everyone’s protection not just the buyer.

The current rate for a professionally done standard Phase 1 inspection is approx. $1800.00 – $2000.00. Just so you understand to obtain the above mentioned documents is hundreds of dollars by itself. The report ends up usually being hundreds of pages. This price does not usually change unless the site gets very large and very involved. Currently the price stated will usually handle over 90% of all commercial real estate transactions.

I hope this clears the air a bit on what a Phase 1 inspection is.

—Bob Pace