8A — June 22 - July 12, 2012 — Owners, Developers & Managers — Mid Atlantic Real Estate Journal
www.marejournal.com O WNERS , D EVELOPERS & M ANAGERS By F. Joshua Millman, AIA, CFM, LEED-AP, FP+A It has become all about risk management
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e always answer phone calls from lawyers with some
sent a new standard of care the buyer is taking before proceeding with purchases at prices they believe have bottomed out. Note that this level of due diligence has not been the direct result of a bank’s requirements (such as the required Phase I En- vironmental Assessment). Still, all parties (including the mortgage lender) are feeling more protected by having had an architect and engineers doing a walk through, writing a report, and having their professional E&O insurance standing be- hind the assessment. This approach to building acquisition is not restricted to traditional building pur- chase contracts. Similar fa- cility review engagements are becoming more common for leases, especially if the leases are triple net and/or long term. Such lease contracts bear many of the risks associated with a purchase. Indeed, purchase or lease, it is all about risk management, moving beyond the position of not knowing what you don’t know. Such risk assess- ments traditionally requires three elements of its provid- er: professional credentials (education and licensure or certification), experience, and a standard operation procedure (SOP). This SOP is best if it is an industry-recog- nized standard, promulgated from an industry-recognized institute. As it happens, the American Society for Testing Materials has a standard procedure, ASTM E2018-08, that sets out a full procedure to do, what is called in the parlance, a facility condition
assessment. This standard is extremely detailed, and can look very much like the sledge hammer for a requirement that could be solved with a tool that is less weighty, and possibly more precise. As an alternative, we have developed a more cost effec- tive, multi-tiered approach that offers an depth of as- sessment appropriate to a client’s particular needs: • Tier 1, a quick walk through of a site, noting whether its deficiencies should keep it on the pros- pect list. • Tier 2, a review of major systems, akin to the stan- dard home inspection. • Tier 3, an inspection meeting ASTM E2018-08, ideal for identifying facility risks that will impact busi- ness operations. To these we have added a Tier 4, that includes an energy audit and identifies actions that could be taken to allow the building to operate more cost effectively, repre- senting acceptable returns on investment in lowering facility-related overhead and energy costs. That is the true nadir of risk management: acquiring a facility that you can run more effectively (and less expensively) than the cur- rent owner. Pretty much the approach corporations use in buying other companies, just applying it to the real estate market. F. Joshua Millman, AIA, NCARB, CFM, LEED AP is a principal at Facilities Planners + Architects, Inc. ■
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trepidation. Recent calls r e p r e s e n t new bus i - n e s s o p - portunities, good news rather than bad news: • One has
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F. Joshua Millman
a client about to purchase a multi-tenant building. The tenants’ leases indicate that the landlord will maintain and replace as required the existing HVAC system. What is the condition of the HVAC system, and when is it likely to require replacement and at what cost? • Another’s client is pur- chasing an historic bed-and- breakfast. They need an estimate on the cost of imme- diate repairs for the facility and likely capital replace- ment costs of major systems over the next 5 years, in order to calculate what pur- chase price will make the pro forma work. Same approach this lawyer ’s clients use when about to purchase a previously owned home. • A third attorney’s cli- ent has a right-to-purchase clause in their long term lease based on a price derived from a third party appraisal. Their strategy is to identify both the building’s deficien- cies and the items that do not conform to current build- ing and accessibility codes. These items would need to be addressed by any buyer in developing a purchase price, and must be considered by the appraisal. Each of these cases repre-
ATTENTION: Architects & Engineers
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Publication July 27, 2012 Deadline July 13, 2012
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