In today’s fast-moving real estate market where properties turn over in a matter of days and loans are being refinanced at all-time low rates, it is not uncommon for property owners to reassess their properties. Whether trying to make a decision to sell or to refinance, business owners will look to their facility managers to help get a comprehensive picture of their building in today’s market. Two key components in the building analysis are physical feasibility and financial feasibility. In this first article of a two-part series, we will provide you with the primary components to be included in a physical feasibility analysis. Next month’s article will focus on conducting a financial feasibility analysis.
To determine physical feasibility, you must systematically evaluate the site and improvements of any property being acquired, developed, or renovated. This evaluation examines the site and its improvements separately, because the legal and tax consequences of a site and a building are different. It is important to remember that almost every physical factor or characteristic has some financial consequence or ramification. Physical factors (or forces that create them) have financial consequences that make them major financial variables. Some of the major types include:
- Legal/regulatory factors: Zoning, building codes, insurance requirements, approval processes in government bodies and agencies, and environmental impact of site activity.
- Base building factors: HVAC, historical patterns of building maintenance, condition of building envelope (especially the roof), electrical system capacity, telephone signal network, lighting system, finishes, and type of fire sprinkler system.
- Tenant space factors: Floor plate size and shape, space measurement systems, mullion spacing, usable/rentable/gross efficiency, and accessibility to systems via raised flooring or demountable walls.
- Organizational characteristics of tenants or occupants: Growth rates and patterns, churn rates and patterns, historical patterns of how space has been funded and acquired, space standards, adaptability of workforce to hotelling and telecommuting, in-house decision-making responsiveness, degree of technology intensiveness, and stance of real property organization.
Feasibility Considerations
The physical analysis of any property requires that you consider the following criteria in each step of the feasibility process:
- Marketability—What is the present marketability?
- Functionality—How functional is the property with respect to the site plan and improvements in their existing state?
- Age—What is the effective age of the property and any improvement? What economic life remains in the property as it is presently developed? If a major retrofit is planned, how long will it perform and how much life will it add to the entire building?
- Renovation—Is physical upgrading, restoration, rehabilitation, remodeling, or modernization required and feasible? How much upgrading is required by code, and how much of this will add value to the building?
Site analysis consists of examining several factors, including:
- Site improvements
- Site survey
- Climate
- Topographic features
- Elevation and slope
- Drainage
- Flooding
- Land/soil contaminants
- Site utilities
- Street analysis
- Zoning ordinances
- Surrounding uses
- Historical, social, and economic conditions
Site Improvements
Site improvements do not automatically contribute to overall value, whether they are tenant improvements to a rental space or improvements installed by the owners of the site.The cost of site improvements does not necessarily equal the value contributed.
Site Survey
One of the most helpful items when inspecting a property is a civil engineer’s or land surveyor’s scaled survey as-built drawing of the site and improvements. The drawing should indicate where the land and improvements are and what they include. A good drawing of this type should show site shape, dimensions, boundary bearings and distances, a legal description, (including acreage to four decimal places), paved areas, parking space designations, landscaping, and the outline of the building foundation. It should also show encroachments and easements, if any, ingress-egress points, location of drainage catch basins, and location of utility lines.
Climate
Climate and solar considerations are important. Is the site in constant shade or exposed to unusual wind and other weather conditions? What impact does the sun have on building orientation and heat gain? The shadows that might be cast by a high-rise office building over neighboring properties may be considered detrimental to market value by their owners. Are snow removal costs substantial?
Topographic Features
Many factors must be considered when evaluating topographic features of a site. These include the slope, elevation, surface contours, water table, soil structure, soil bearing capacity, septic leaching capacity, and other matters that affect the function of a site. Vegetation on a site is too often overlooked. Certain types of trees indicate dry and sandy soils; others may indicate damp soil.
Elevation and Slope
Above-grade or below-grade elevations of a site, as compared to its adjoining streets or neighboring properties, can be either a detriment or an advantage.
Drainage
Drainage retention is a growing environmental concern. Many communities have requirements for newly developed sites, dictating that the rate of storm water runoff, after development, cannot exceed what it was prior to development.
Flooding
The potential for flood hazard must be determined. If there have been slides, flooding, subsidence, or even a history of earthquake problems, ongoing and future use will obviously be affected.
Land/Soil Contaminants
Contaminants are a more recent soil condition problem. Former industrial sites are particularly subject to these conditions because they may contain chemical wastes, nuclear materials, asbestos, polychlorinated biphinon compounds (PCBs), or other contaminants. The presence of air, soil, or water contaminants might be discovered only by investigation of the site history. For example, a property that is downwind of industrial areas and receiving airborne contaminants or hazardous fumes can be evaluated through examination of public records.
Site Utilities
The presence and adequacy of utilities serving a site must be carefully cataloged. These normally include sanitary sewer, storm sewer, domestic water supply, manufactured or natural gas, telephone, cable television, and electric power. In some cities, steam or hot water is piped under city streets for heating.
Street Analysis
Carefully consider existing street improvements. The surface’s slope, grade, and drainage design are important. Does water stand or pool? Does runoff cause shoulder erosion? Are there curbs and gutters? How wide is the actual, legal street right-of-way? How wide is the improved or developed road surface? Is there street lighting, and is it served by buried or overhead power? Are there center medians installed that prevent left turns? Do they affect the usefulness of the site? What curb cuts are allowed from the street to a site for access? What is the observed quality of all of the street improvements? Have they been installed at minimum standards, or are they unusually well constructed?
Zoning Ordinances
Governmental and self-imposed private restrictions on property affect site use. Zoning may specify the height and types of buildings—as well as their shape and bulk. Inconsistency of a jurisdiction’s maintenance of zoning regulations can have a physical effect on a site.
Surrounding Uses
Surrounding uses are important because they have an impact on site value. An inventory of site amenities and drawbacks is needed to account for factors such as highway and transportation access, uses of adjoining properties, and appropriate site size for the intended use. Conditions that are unfavorable to some users may create opportunity for others. Such conditions affect the market price of a site, and there is an advantage to be gained through the recognition of opportunity.
Historical, Social, and Economic Conditions
Historical and social factors can affect the physical viability of a site. In the past, retail stores commonly had large display windows. Today, many are built as blank-wall fortresses with no windows at all and limited door openings to minimize economic loss in high-crime areas. A few years ago, a major corporation designed and built multifamily units which did not meet the social and economic needs of the low-income residents who would occupy them. Even the neighborhood where the site was located was not acceptable to the intended occupants. The corporation had failed to investigate the history of surrounding properties, including the one they purchased. The buildings did not rent well and still continue to experience high vacancy levels.
When analyzing the physical building, the following items are key factors to assess:
- Ceilings
- Concrete construction
- Curtain wall exteriors
- Domestic water supply
- Doors
- Electrical, data, and communication systems
- Elevators
- Finishes
- Glass
- Heating, ventilation, and air conditioning systems
- Interior enclosures
- Lighting
- Masonry construction
- Plumbing systems
- Qualities of design
- Rest rooms
- Roofs
- Size, quality, condition, and code compliance of any improvements
- Skylights
- Sprinkler systems
- Tenant improvements
- Waste systems
- Wear and tear
- Windows
- Wood construction
Although the information provided herein is by no means all-inclusive, it should give you a solid basis on which to begin your physical feasibility analysis. The information provided in this article is adapted from BOMI Institute’s Real Estate Investment and Finance course book, revised and updated for 2004.