| FEATURE ARTICLE, JANUARY 2006
TIME IN A BUILDING
To remain lucrative, older office buildings require work.
Terrell Marsh
The hot commercial real estate market of the past several years has resulted in new participants becoming owners of office buildings. Small associations and businesses, as well as individual investment groups, have moved up the asset scale and bought office buildings — in many cases, these new owners purchased older office buildings. As the euphoria of the acquisition wanes, these first-time office building owners will have to deal with the difficult issues that most older buildings intrinsically present.
Older office buildings frequently contain original building systems and equipment that were installed when the building was built (HVAC units, boilers, condensers, back-up generators, fire alarm systems, electrical systems, roof systems, elevators, etc.). Owners who do not implement proper maintenance programs will invariably have more breakdowns and incur higher operating and capital improvement costs. Since owners are usually not technically knowledgeable about systems and equipment, they are also vulnerable to being given bad advice (unintentionally or otherwise). Inexperienced service personnel who are not familiar with older systems or equipment may claim it to be obsolete, that replacement parts are not available, or that there are incompatibility issues with new parts and older equipment. Moreover, companies that service HVAC units, elevators, fire alarm systems, roofs, etc. probably have a greater incentive to replace your older system or equipment, rather than repair it.
Despite their age, older systems and equipment can often continue to effectively operate — if they are properly maintained. Utilizing predictive and preventive maintenance practices on older systems and equipment can significantly extend their life expectancies. Purchasing a supply of certain parts for older equipment in advance of breakdowns can also extend useful life. Even if such parts are no longer being manufactured, inventories of the parts can often be found along the distribution channel if one knows where to look. Likewise, an older HVAC system that is not providing sufficient heating and cooling to meet today's standards does not necessarily have to be replaced with a new system. Rather, inexpensive, after-market devices can be utilized to supplement the system to meet today's requirements. These few examples illustrate how implementing some simple proactive measures can minimize breakdowns, allow for routine part replacements, and avoid capital improvement costs for new equipment or new systems. Moreover, the additional useful life achieved provides the owner with more time to set aside reserve funds for the ultimate replacement of the system or equipment.
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8001 Braddock Road in Springfield, Virginia, was built in 1980. This building has been impacted by changing building codes, life safety codes and ADA requirements.
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Older office buildings typically contain numerous violations of building codes, life safety codes and are in non-conformance with Americans with Disabilities Act (ADA) regulations. Such building codes and regulations are periodically updated, which is why the violations accumulate significantly over time in older buildings. Building and life safety codes affect virtually every aspect of a building. Some violations are readily visible while others are concealed. These codes address such esoteric items as the amount of fresh air that is introduced into an HVAC system; whether electrical wires are wrapped in rubber or aluminum; whether the interior framing of a wall was constructed with wood or metal; whether gypsum drywall has a fire-rating of 1 hour or 2 hours; whether the elevator equipment room is air-conditioned; and whether the fire alarm system automatically notifies the fire department when it is activated. Many building and life safety code violations in an older building are “grandfathered” and are only required to be corrected upon the renovation of a building. However, the renovation of even a small portion of a building may trigger building-wide compliance with certain building and life safety codes. Unfortunately, when a compliance event such as a renovation occurs, a Pandora's Box is opened and the violations that must be remedied can multiply rapidly. The owner's open-ended financial liability to remedy the litany of violations can be sobering.
The good news is that there are ways to mitigate the owner's financial exposure. However, in order to obtain the expert advice and knowledge to do so, an owner must possess the financial sophistication to realize that several professionals must be consulted. For example, some first-time office building owners with an upcoming interior construction project believe that hiring a relative who owns a flooring company along with his friend who is a residential architect is a savvy move that will save money. It is actually an unwise course that usually results in disastrous consequences and higher costs for the owner. Conversely, tapping the collective knowledge and experience of just a few professionals with extensive experience with older buildings can significantly reduce compliance costs for the owner.
Older office buildings also typically suffer from certain design flaws, which usually cannot be fully corrected but can be mitigated in many instances. Many older buildings have small floor plates, which translates into high core factors. This can very much hinder leasing efforts, but there are some strategies that can be helpful. One example is to professionally re-measure the building for leasing purposes. Similar to building codes, accepted standards and practices for measuring square footages have been updated over time, and most benefit landlords. We have often encountered owners who collect less rent because they still utilize outdated square footage figures in their leases.
Outdated design features in older office buildings also reduce the marketability of the building to prospective tenants as well as the rental rates that can be achieved. A few other problem areas include low ceiling heights, single-zone HVAC systems, poor column spacing that exacerbates space planning, insufficient electrical capacity and small restrooms that cannot be fully ADA compliant without reducing the number of fixtures. Again, many of these items are inherent in older office buildings and cannot be fully corrected. However, owners who are not technically knowledgeable about such matters should surround themselves with a few qualified professionals who have significant experience with older buildings. Only then can owners know with confidence what can and cannot be remedied, and what alternatives are available.
Meanwhile, meeting the demands and expectations of the occupants of an older office building can be another ongoing challenge. A building may be an investment property occupied by tenants, an owner-occupied building with employees, or some combination thereof. Regardless, these occupants have become more knowledgeable and sophisticated over time. The occupants in your building may be aware of (and expect the landlord to address) such items as sick building syndrome; sophisticated security systems; high efficiency, multi-zoned HVAC systems; asbestos materials; and high-speed Internet access.
Previous owners of an older office building encountered all of these same issues. In an attempt to offset their financial expenses, many owners coped by self-management, deferred maintenance and other poor operational practices. Their mismanagement unfortunately compounds and exacerbates matters for the new owner. New owners should realize that the most prudent way to reverse the mismanagement and properly manage the many issues in older buildings is to undertake a comprehensive assessment of existing conditions with qualified professionals who have experience with older buildings. With that knowledge the new owners will be able to properly plan how to better manage their building and their financial resources over the years.
Although we have only been able to mention a few of the pitfalls owners of older buildings confront, it should be obvious that utilizing the services of a professional and accredited property management company is critical to protecting the owner's asset. Some owners unwisely choose self-management and appoint an employee as a part-time property manager. Despite good intentions, these laypeople cannot effectively manage the issues because they lack experience, market knowledge, negotiation skills, and vendor relationships. In this era of specialization, it is difficult enough for full-time property management professionals to keep up with ever-changing labor and material prices, market practices and technological advances, let alone an employee with the dual role of being a property manager. Self-management is another pitfall, as inexperience and lack of knowledge result in owners being taken advantage of financially and otherwise by the various contractors that specialize in compressors, condensers, roof systems, elevators, parking lots, etc. Conversely, a property management firm's interests are the most aligned with the owner's interests. Moreover, a property management firm also provides buying power for an owner of an older office building, as the firm probably manages several dozen other properties.
In conclusion, owning an older office building can be a financially rewarding experience. However, in order for ownership to be successful owners must realize that their older property requires special attention, which can only be provided by qualified professionals who have significant experience with older buildings.
Terrell Marsh is a principal with Falls Church, Virginia-based Trimark Corporation.
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