Do Your Due Diligence: Four Things To Do Before Committing To a Vacant Building

This post is the first in a series by Mike Gilbert of The Jones Trust that will focus on how to repurpose existing and vacant buildings in a cost effective way. It is very important not to cut corners in the due diligence process before you commit to renovating a property – you might end up with some unfortunate and costly surprises.  

Many buildings throughout North America are unoccupied, in a state of disrepair and/or abandoned. These buildings present amazing opportunities to preserve history or unique architecture, and it can be more cost effective to renovate than to build new.  However, older buildings are typically constructed using asbestos containing materials in varying components.  Many of these facilities were built under older building codes with less stringent requirements for life, safety and accessibility.

Repurposing older buildings can deliver outstanding project economics and return on investment if we do the hard work on the front end. Before you commit to a vacant building, make sure to do your due diligence. Identifying and fully understanding the potential risks of building renovation is a monumental task for the skilled developer and even more challenging for an individual, organization or group that does not do so on a regular basis. It is critical to be conservative at this stage of the project, investigating all possible risks that can become known prior to commitment to proceed.

As you plan your project, here are some tips to keep yourself from purchasing a money pit.

1. Assemble a team of experts. Numerous skills are required to put together a full understanding of the challenges involved in building renovation. You, as the lead developer, are like the head coach, matching your player’s skills with roles on the project. If you don’t have the skills already on your staff, you may need to hire paid consultants Some of the roles you will need filled include:

• Environmental Safety Assessment (ESA)
• Building Envelope Assessment
• ADA Assessment
• Mechanical and Electrical Systems Evaluation

2. Conduct an ESA. This process will identify any important hazards that must be addressed during the renovation process. Environmental remediation can be extremely expensive, can destroy project economics and potentially kill a deal in progress. Typical ESA costs are between $3,000 and $7,500 for the initial work, although costs can vary significantly based on factors including size, age, location and more. This step cannot be avoided.
3. Bring on an architect to do Building Envelope and ADA Assessments. The Building Envelope Assessment will give you a fair assessment of the weather tightness condition of the building including roof, windows, exterior skin, expansion and control joints, etc. The ADA assessment will help in the design process for compliance and can sometimes be expensive if new ramps are needed or if elevator upgrades are required. Cost of this investigation should run between $5,000 and $10,000 depending on the scope.
4. Evaluate the mechanical and electrical systems. This process determines the suitability of the existing systems to accommodate the desired improvements. This evaluation is normally completed by a mechanical and electrical engineering firm. The investigation should cost between $2,000 and $6,000.

The due diligence phase of project evaluation is a very detailed process and can range in cost from as little as 1% of your project budget up to 3%, depending on the scope of work and level of detail desired.

Analysis of the various reports will allow you to fully develop a preliminary renovation budget that will feed into the pro forma budget for the project. Our next post will dive into strategies to consider in developing a preliminary project budget and feasibility study.