Spend A Little Now, Save Millions Later: The Benefits Of An Acquisition-Level Assessment Report
Purchasing a multimillion-dollar commercial real estate asset is no small undertaking. The earning power of these properties has the potential to impact dozens of stakeholders, and sometimes, all it takes is one overlooked roof issue or a crack in the foundation to turn an asset into a money pit.
One of the best ways buyers can avoid this fate is to conduct proper due diligence before closing the deal. A key step in this process is to order an Acquisition-Property Condition Report, or APCR, which provides buyers with an in-depth analysis of a property's condition, systems and components.
A debt-level property condition report will offer buyers basic information about the condition of the property and how it could impact the asset’s financial performance, but buyers who truly want peace of mind should take things a step further.
“A debt-level report will tell you some of what you need, but an acquisition-level property condition report goes above and beyond,” said David Stewart, national program director and business development account executive for acquisition services at EBI Consulting, whose team conducts acquisition property assessments for a wide range of CRE clients. “These reports go much more in-depth to show details that can mean the difference between making a smart investment and losing millions of dollars on a deal.”
Stewart said that an acquisition-level report is much longer than a debt-level report and is conducted by senior-level assessors — architects and engineers with 15 or more years of experience conducting property assessments.
At EBI, his acquisition-level assessors approach each property in a granular, focused fashion, he said, and nothing gets a free pass. Any deficiencies are included in the “Immediate Repairs” section of the report, and those items identified go far beyond what is simply required for underwriting, so buyers can have a complete understanding of what they are going to purchase. Depending on the risk tolerance or risk strategy of his clients, the APCR can be augmented with additional specialty assessments, such as roof, facade, MEP, Americans with Disabilities Act, etc.
Stewart told the story of one EBI client who came to the firm for a debt-level report on a seven-story commercial building with a subterranean parking garage. Through a review of the offering memorandum, Stewart saw that the current owners were completing $750K worth of repairs on the garage each year, which was a red flag to him that more expensive work may still need to be done, etc. His team coordinates and manages the entire process, and consolidates all the information into a single report where the client can clearly see all the information they need.
He convinced the clients to take the time for a more in-depth acquisition-level assessment, which discovered that there was $4.5M of work that remained to be done on the garage alone.
“If that client had stuck with a debt-level report, they may have found a few hundred thousand dollars of work that needed to be done, and they would have been stuck with a $4M bill they weren’t anticipating,” Stewart said.
In the end, the client made the decision not to purchase the property based on the acquisitions-level report conducted by EBI, he said, saving them millions of dollars.
“They were disappointed, but at the same time, they were ecstatic because they knew they dodged a bullet,” Stewart said.
Stewart gave an example of another client who came to EBI with a property assessment report that had already been completed, asking for the team’s opinion on whether it was sufficient. He advised them that if they were considering making a high-risk and high-profile purchase, they should engage his team for the full suite of reporting EBI has to offer — fire and life safety systems, mechanical systems, a facade analysis, energy audits, examinations of the elevators and escalators and more.
EBI mobilized a massive team of 36 assessors, compared to the two who had conducted the initial report, and sent them to the site. EBI’s report discovered more than $1.5B in work that would need to be completed to keep the property up to date, substantially more than the previous report indicated.
In the end, while the client went through with the sale, it had a better understanding of the value, and the challenges, presented by the property.
Stewart said he understands that some CRE buyers believe that they do not have the budget for a comprehensive, acquisition-level property report in their due diligence “bucket,” but to him, it’s clear that they are worth it.
“The findings identified during due diligence for a typical acquisition transaction, and the ability to retrade or negotiate on sales price, is absolutely worth the cost of the report,” Stewart said.
With EBI’s reporting, clients are empowered to go back to the sellers to negotiate based on EBI's findings.
“Before making a decision about what type of property assessment to go with, buyers should ask themselves, ‘Do I have the budget for $1.5B, or even $1M, of surprise repairs?’ The answer is likely, ‘no,’” Stewart said.
This feature was produced in collaboration between EBI Consulting and Studio B. Bisnow news staff was not involved in the production of this content.
Studio B is Bisnow’s in-house branded content studio. To learn more about how Studio B can help your team, reach out to firstname.lastname@example.org.