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Engineering and ROI

Satisficity - a combination of satisfy and suffice - defined as "economical, expedient, and just enough."

The emphasis in real estate investment has shifted from property appreciation and mortgage income to equity investment and operating income.

This issue of Engineering Advisor highlights ways that engineers can improve the bottom line for real estate investors, owners, and managers.

Building investors, owners, and managers hire engineers on two principal occasions: prior to the acquisition of a property to learn of its current condition and future maintenance requirements, and when problems such as a structural or mechanical failure arise. Few realize that an engineer can help to maximize income from operations.

Conventional Methods

Upon reflection, many other conventional engineering services may come to mind, in addition to property condition assessments, environmental assessments and repair design.

Feasibility Analysis: One way to add value is to change the use or tenancy of a property. An investor or owner may transform a warehouse into multi-family space, an industrial facility into retail space, an office building into a hotel, or change tenants from an advertising agency to a direct response/telephone marketing agency. An engineer can answer questions such as: Is the structure adequate? Can walls be moved? Can the HVAC system handle the load of new equipment? Can the electrical service be upgraded? Are there environmental concerns? What code requirements must be met? What will all this cost?

Preventive Maintenance: Every owner recognizes the value of preventive maintenance, although some take the concept more seriously than others. A reserve study to plan future maintenance is almost always money well spent. Repairs are more expensive than the cost of preventive maintenance.

Energy Management: Another way to improve profitability is to reduce energy costs. Depending on the ownership and leasing arrangements, energy costs may be a significant part of those costs for the owner. Energy management systems, re-lamping, and other strategies have all been demonstrated to save money.

Non-Conventional Methods

Too often, we have seen building maintenance and repair decisions left to accountants and contract service companies. Repairs may be overdesigned and therefore overly expensive; they may be underdesigned and therefore inadequate.

Engineering is the art of accomplishing a design or repair goal with the least cost or intrusion. The engineer's job is to look at the problem and come up with the solution that not only works, but that also works within the design constraints of intended life, budgets, and current use. In extreme cases, a new word has been coined for this: satisficity - a combination of satisfy and suffice - defined as "economical, expedient, and just enough."

Recently, we examined a building that was reported to have an indoor air quality problem. The air smelled and ceiling tiles were discolored. A contractor's solution to this type of problem is often to replace everything. That increases the size of the job and is usually the safe way to ensure that the problem is solved. In this case, that would have been wrong on both counts. The air intake was near a major highway, and the system had too few return air supplies. Adding both filters to the intake and more return air vents was inexpensive and solved the problem; new ductwork and mechanical equipment would have been expensive and nothing would have changed.

Planning for the Term of Ownership

Investment objectives for commercial real estate do vary. Business environments change. Most buyers and investors plan to acquire property with a time horizon for that acquisition. This ranges from the quick turnover to long-term ownership. Maintenance costs money, and deferred maintenance can be even more expensive. An engineer can develop a maintenance plan and tailor it to the ownership horizon. No owner wants to make a major capital expenditure if the building is to be sold next year. Conversely, certain things must be done to maintain a building and prevent it from deteriorating, thereby protecting its value. The engineer can provide such opinions by exercising the judgment gained from looking at hundreds or even thousands of buildings.

In an ideal world, all buildings would receive the best maintenance to prolong the life of all systems. If one intends to own the building for the long term, and if cash is readily available, this is always the best approach. In the real world, however, a building owner should ask how much of a repair investment will be returned at the time of the sale? How much will be deducted from the price for failure to make this repair? What is the effect on sale price of making a less costly repair that extends 2 to 3 years into new ownership? What are the collateral consequences of deferring the repair? And of course, how does the cost of the repair (or upgrade) affect the return from higher rents or occupancy?

For example, an owner of a garden apartment complex may be faced with the need to reroof. A less expensive system, known as Lay-Over Roof Recovery System that Criterium Engineers has been evaluating for the roofing company that developed this innovation may extend the useful life well into the term of new ownership.

Conclusion

An engineer is trained to develop the most effective solution to a problem. The wise use of engineering services is based on framing the question(s) or parameters according to your needs. This approach is distinctly different from that taken by contractors or building maintenance staff, each of whom also plays a valuable role. We hope that this issue of Engineering Advisor has given you some suggestions for framing the question so that you, as a building owner or manager, can maximize your operating income. For more information or assistance, please call us.

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The Engineering Advisor is intended to enhance your knowledge of technical issues relating to buildings. For additional information on any subject, please feel free to call us. Our commitment is to provide you with timely, accurate information.

Criterium Engineers, Copyright © 1999