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Before Visiting the Site
Prepare Yourself. As a minimum review and study the site plan, architectural floor and elevation plans, structural plans, HVAC plans and electrical riser diagrams. Familiarize yourself with the subject, its layout and major components and systems. Note the key site and building features. For the site, note the limits of the property security with respect to key features so that you can identify them when on site. Note the compass orientation of the building, the layout of paved areas, utility easements and major drainage structures. For the building, note the layout of common areas (lobbies, corridors, stairs, elevators and equipment rooms) and tenant areas on each floor. Remember the structural frame type, the major building envelope features and the type of mechanical systems and the locations of mechanical, electrical and life safety equipment. The purpose of this is to allow you to walk the subject property with a sense of confidence and direction during the inspection.
Arrange for the Site Visit. The technical representative should make arrangements over the phone, through the owner’s representative, for access to inspect all areas of the subject property. While on the phone with the owner's representative, inquire about the owner's list of planned capital expenditures if you have not yet received a copy. You should be sure that the owner’s representative understands that access to all areas of the security is desired, including tenant areas and roofs. You should verify with the owner’s representative that an escort will be present during the inspection to provide access to all areas. The escort should be knowledgeable about the operation and maintenance of the property, be known by the tenants and be prepared to answer any questions regarding the physical features that may arise. This escort should be prepared to provide equipment and assistance in obtaining access to all areas including, as appropriate, tenant introductions, ladders (of proper length and configuration to provide safe access, reaching at least two feet above the height of he roof), attic access, keys, etc. The worst thing during an inspection is to be accompanied by someone who cannot answer any of your questions.
Encourage the investment originator to accompany you on the inspection. They will learn a lot from each inspection and will see first hand any concerns. It is always advantageous to get them involved in discussions between the property managers and yourself. Your objective should be to educate each investment originator to become as astute as possible in spotting concerns early in the investment process, preferably at the time they first visit the property. In this way they can bring them to your attention early, so that the two of you can discuss potential resolutions before the inspection and plan strategies for discussions with the owner, should your inspection confirm items of concern.
I used to particularly enjoy working with two business associates who approached the inspections in their own unique way. One was a male regional office manager who I worked with for several years and who faithfully accompanied me on every inspection in his region for which he could find the time. After about a year, he hardly needed my services. He would meet me on site, having performed a thorough inspection prior to my visit. He would take pride in anticipating my path of travel and in knowing all of my areas of concern. We would begin with him saying, "At which boundary line should we begin?" And as we proceeded, he would point out each concern that he had previously identified, being sure to tell me about it before it came into view. He took particular pride if he had found all of the "hair on the deal", as he would call it, and my efforts could add no more. The second person was a woman who always insisted on seeing every inch of her deals. She would always be dressed in a business suit and heels, carrying an oversized handbag. When it came time to climb up onto the roof of a property requiring ladder access, she would slip away and emerge with sneakers in place of the heels and with pants under her skirt.
What You Will Need. At the time of your inspection, you should have in your possession a list of all capital expenditures being planned for the property over the loan term or, or as a minimum, over the next five years. Bring with you a tape recorder and camera or a video camera, the site plan and binoculars for any buildings over three stories in height. Carry a small flashlight to illuminate dark areas such as crawl spaces and attics and a small pocket umbrella to protect your camera, if rain or snow can be expected. If you can’t afford a long delay, remember that the remnants of thundershowers can linger for long periods, so don’t get caught off guard during the summer. Bring a small roll-up pocket measuring tape (six-foot length is adequate) to spot check critical ADA accessibility dimensions, such as toilet sink vanity clearances, and door or stall widths. Of these items, the tape recorder (or the audio portion of the video camera) is most important. It enables you to jot down all of your notes in even the worst weather. Don’t rely upon your memory alone.
During the Site Visit
Prior to beginning your inspection, inquire again about any planned capital expenditures being considered during the loan term (if you have not yet received this list). Some owners resist providing this information and it often takes persistence to get a copy of their plan. If at this time you still do not have a copy, you should question each concern that you may observe as you inspect the property. Sometimes to get an owner's representative to reveal their plan you can point out the need for the work by asking, "Are you planning to have this work performed?" If the answer is "Yes," make a note of it. At the end of the inspection, request to see copies of any contractor's quotes or other information that the owner's representative may have amassed regarding the scope and cost of any "yes" work item.
There are two rules you need to follow in order to control the inspection:
Take the lead, don’t be led – If you permit it, your guide can easily lead you away from what you should see. Plan ahead so that you generally know what you want to see. Remain alert to the purpose of the inspection. Try to avoid conversation not related specifically to what you are observing or you may overlook something important. Proceed slowly and remember that no one knows everything, so don’t be concerned with becoming overwhelmed.
Ask the right questions, don’t assume anything – To gain confidence on a strange property, ask a few stock questions that you have prepared as you begin the walkover. If something looks broken, don’t assume that it is. Ask, "Is that broken?" If something looks unfamiliar or odd you might say, "What is that?" or "That looks odd. What can you tell me about it?" No physical defect is too small to warrant a question such as, "Did you notice that before?" Question even the most seemingly insignificant failures and judge what your knowledgeable host says about his or her plans to repair it. If he or she has never noticed the deficiency, that might be saying a lot about how the property is being maintained. Always ask, "Are you planning to repair this prior to closing the loan?" If the answer is "No," ask when he or she anticipates that it will be repaired. Follow up with, "Do you know what caused it to fail (or crack or settle, as would be appropriate)?" Repeat the answers into your voice recorder and be sure to snap a photo or run the video tape. By doing this you will have a complete log of all you have seen and all of the answers that you were given. If your host commits to performing repairs or gathering more information for you, having it on tape will simplify the preparation and acceptance of your recommendations and the preparation of a confirming letter by the loan originator. If the deficiency appears major or if it is repeatedly observed, your voice notes and photo-documentation will aid in later conversations. You will be surprised at the wealth of information that you can learn from the seemingly simplest of questions.
Beginning the Inspection. Its a good idea, when one of your hosts suggests that you begin the walk-through or asks where you would like to start, for you to say, "I’d like to start by walking the perimeter of the property". When you begin your walk, head in a specific direction to look at some key feature that you have identified from your review of the site plan. That key feature may simply involve heading toward the general vicinity of a property line to observe an adjoining property that caught your attention as you drove in.
This will serve three purposes:
- To get you initially away from the building where you can easily become distracted, and thus "led" through the building (remember at this point –proceed slowly and take time to recall the details of the engineering document review).
- To establish the fact that you are in control and leading the expedition (this you must do to assure that you will see everything needed).
- To ask a few stock questions, which you have prepared on your way to the predetermined destination. This will not only provide you with information; it will also set the tone of the inspection with regard to the type of information that you are expecting to ascertain.
Remember that you don’t have to be an expert to gather all of the right information during an inspection. In fact, as appropriate, you might emphasize that your knowledge of some disciplines is limited while at the same time asking all the right questions.
Some stock questions. You should always begin your inspection with some stock questions. When possible, these should be asked as you approach or traverse an item of concern on your way to the perimeter of the property.
As you pass landscaped areas near the building, you might ask, "What areas of the site does the underground lawn sprinkler system serve?" Out in the parking area, "What is the pavement specification?" (The thickness of finish and base courses plus sub-base); "How often do you seal-coat and re-stripe the pavement on your properties? " (This should be done every five years or less); Or if it looks newly seal-coated, "When was the pavement seal-coated?" As you are approaching the limits of the property, "Can you show me where the property line runs along the southern perimeter? " (Or other compass direction that you have memorized from your review of the site plan); or "Can you tell me about the property next door? Is that drainage swale (or fence or other prominant feature) on the security?"
Be wary of answers in the form of questions such as, "Huh?" or "What do you mean by that?" Don’t be intimidated. Play dumb if it is to your advantage to do so, and ask the question again a second time. Avoid rephrasing a question. The original question may have hit upon a sore point or a recurring problem. You should expect an answer to all of your questions, even if the ultimate answer is, "I don’t know." Note out loud into your voice recording that you need an answer to each specific unanswered question. This will preserve the question for you and let your host know that he or she owes you an answer.
The Inspection Sequence. Once you have reached the property perimeter, stop and look around. The inspection is about to begin. Remember that your objective is to inspect ALL of the physical features and to ask all the right questions. Keep the questions simple and assume nothing. One of your objectives should be to find out as much as possible about past repairs, recurring problems and maintenance procedures. Ask about anything observed that looks the least bit wrong or questionable.
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