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Investor Insights Blog|Commercial Property Inspections: What to Expect as a New CRE Investor

Real Estate

Commercial Property Inspections: What to Expect as a New CRE Investor

commercial property

By guest blogger Kenn Garder, National Property Inspections

Investing in commercial real estate (CRE) is a big next step in building out your portfolio. Luckily, owning residential properties will have given you a great base of knowledge for acquiring commercial buildings.

One aspect of the purchasing process that won’t change is the importance of ordering an inspection. Here, we’ll break down how to hire the right inspector, what to expect from your commercial property assessment, and how to get the most out of your inspection experience.

Why do you need a commercial inspection, and how does it differ from a home inspection?

No matter what type of building you’re looking to purchase, whether a multi-family property, warehouse, office space, or special use facility, you’ll need an inspection to make the best investment decision—and get the best price.

Commercial inspections and home inspections differ slightly in their main goal. Much like a home inspection, you’re concerned with securing a fair price, ensuring the property is safe, and planning for any future repairs. But when it comes to commercial, you also need to know how quickly you can start seeing a return on investment and how much it will pay off in the long run. Since commercial building repairs and system replacements are significantly more costly than residential, calculating upfront costs versus ROI can be the difference between moving forward or passing on a property.

Your lender may require a property condition assessment in order to move forward with a purchase agreement. But if you’re planning to pay cash, it’ll be up to you to ensure an assessment is part of the acquisition process.

Who can perform a commercial building inspection?

For a commercial property, you won’t want to hire just any home inspector. Commercial systems are much different and often more nuanced than residential systems, so a home inspector’s skillset won’t automatically translate.

Instead, you’ll need an experienced inspector with specialized knowledge of commercial buildings. National Property Inspections inspectors perform both home inspections and commercial property condition assessments, and they’re equipped with the training and knowledge to provide a customized report tailored to your needs.

Commercial systems are much different and often more nuanced than residential systems, so a home inspector’s skillset won’t automatically translate.

Kenn Garder, National Property Inspections

Note that if your building contains specialized equipment, like a walk-in cooler or elevator, or if the property is especially large, your inspector may bring in other experts to assist them. Also keep in mind that not every inspector will automatically note building code violations. If this is information you’re interested in gathering, make sure you discuss your options with your inspector.

Just like with any contractor, you’ll want to vet your commercial inspector. Not only will you want to verify their credentials, you’ll also want to gain an understanding of what to expect from your experience. Depending on the type, age, and size of your building, the scope of the inspection can vary greatly.

Make sure you address these questions:

  • Are you a licensed inspector? What type of training and experience do you have in commercial?
  • How long have you been inspecting?
  • What type of equipment do you use?
  • Will you note building code violations?
  • Will you be bringing in outside contractors or other inspectors?
  • Could I see a sample report?
  • What is your cost estimate for this project, and how long will the process take?
  • When are you available for the inspection, and when can I receive my report?

What will your inspector look for during the assessment?

One of your inspector’s main goals will be to identify the condition and projected lifespan of your commercial building’s five major systems: HVAC, plumbing, roofing, structure, and electrical. They’ll also check the building’s fire safety systems and alarms. This aspect of the assessment is much the same as a home inspection.

In addition to the items above, your commercial inspector will also check:

Important Documents. Prior to the inspection date, your inspector will likely request important documents pertaining to the property. These may include appraisals, past inspection reports, maintenance records, permits, floor plans, square footage, and surveys. It may be your responsibility as the investor to provide these documents.

Building Interior. Your inspector will check your building’s interior for any safety hazards. They’ll look at bathrooms, walls, ceilings, individual rooms, hallways, stairs, and more.

Building Exterior. Your building’s exterior isn’t just limited to its structure. Your inspector will of course check structural integrity, but they’ll also inspect parking lots, including separate structures, wheelchair access ramps, and landscaping.

How will you determine scope of work?

Since commercial buildings vary so widely, it’s important to discuss scope of work with your inspector. Every commercial inspection is different, and your inspector will tailor their services to your specific needs.

Studying the building’s history and maintenance records can help you and your inspector come up with an advantageous strategy. For example, if you’re investing in a multi-unit apartment building or hotel, you’ll want to set certain parameters. Are you interested in getting a full snapshot of the condition of 20 percent of the units in the building, or does it make more sense for your inspector to check the 10-year-old HVAC systems of every unit?

Your final assessment report will include a written description of any issues found in the building based on agreed upon scope and a suggested lifespan for systems and appliances. It’ll also include high-quality images of any defects found.

How do you prepare for a commercial inspection?

Once you’ve settled on a scope of work and an estimated cost, preparation will depend on your building and whether it’s occupied. Expect to take these steps:

Sign a pre-inspection agreement. This is a legal document that protects both you and your inspector from liability and will be a requirement for any inspection.

Provide important documents. If you’re responsible for providing the important documents described above to your inspector, make sure you hand them over several days before the inspection.

Create a list of instructions, and make sure your inspector has access. Failing to provide access to certain areas of the building will result in incomplete information and an inconclusive report.

Your inspector may need certain keys or codes or be required to enter certain areas of the building only at designated times. You’ll need to coordinate with the property’s current owners or management team to make sure access is granted and any legal requirements for entering the property are met, especially if your inspector will be entering occupied apartment units.

How do you make the most of your commercial inspection?

Proper planning is key to having a great inspection experience and getting the information you need from your condition assessment.

To recap:

  • Vet your inspector by asking the right questions.
  • Collaborate with your inspector on the scope of work.
  • Provide any documentation for your building.
  • Sign a pre-inspection agreement.
  • Ensure your inspector has full access to the building.
  • Ask as many follow-up questions of your inspector as you’d like once you receive your report.

Check these boxes, and you should be prepared to make the best financial decision, negotiate price, and accurately calculate your ROI.

About Kenn Garder

As manager of the National Property Inspections (NPI) National Accounts department, Kenn guides clients throughout the commercial inspection process. He serves as the central point of contact for NPI’s national clients.

Kenn also provides residential and commercial technical support for NPI inspectors and leads training in commercial inspection. He has been with NPI since 2006.

1

Can my IRA invest in a newly formed entity that will invest in real estate?

Yes. Investments in newly formed private entities, such as limited partnerships, limited liability companies, C corporations or land trusts, are permissible under the Internal Revenue Code, with the exceptions of subchapter S corporations.

2

Can my IRA purchase real estate that I currently own?

No. This is considered a prohibited transaction (see IRC 4975). You may not purchase a property, or interest in a property, that’s currently owned by a disqualified person, which includes yourself.

 

As Equity Trust Company (“Equity Trust”) is a directed custodian, like any investment, it is your responsibility to conduct your own due diligence before investing and before choosing a provider that is right for you. Equity Trust may, from time to time, establish independent contractor relationships with third-party providers, as described above, whereby you, as the IRA owner, can have access to third-party providers for services that may be beneficial to you. Equity Trust is not an affiliate of any such provider. Equity Trust makes no recommendation or representations as to any provider and service or the needs generally of any IRA owner or any IRA. Any service available from any provider that offers investment education or advice solely reflects the views of such provider and in no way represents any recommendation or advice from Equity Trust. Opinions or ideas expressed by third parties, their affiliates, and employees are not necessarily those of Equity Trust nor do they reflect their views or endorsement. IRA owners are in no way obligated to purchase services and IRA owners are free to choose a provider with services as they deem appropriate. IRA owners should consult with their financial and legal advisors before choosing to work with any provider.


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