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Selecting an In-House Technical Representative
A skilled technical representative who understands all of the important physical issues regarding commercial real estate investment is rare. One who further understands the functioning of the investment process and how to communicate perceived physical risks to investment decision-makers is rarer still. For organizations already with strong technical representatives, the training and passing down of knowledge is the best method for developing new technical representatives. For those without technical representatives wishing to add a technical representative to staff, training assistance from sister organizations with strong technical programs should be sought (co-investors are a good source). Request copies of technical guidelines and policies, ask if advice could be provided by their technical representative on an as-needed basis, and make arrangements for the new technical representative to spend a block of time at the sister organization to observe and learn from their technical representative.
A successful technical representative within your organization should understand the following issues as a minimum:
- The physical parameters that form the basis of the property's valuation (particularly the gross and net rentable floor areas by calculation from the plans).
- Investment grade issues for appropriate property types.
- The physical issues that contribute to investment risk, including physical deficiencies, items of questionable durability and items of functional obsolescence.
- The expected service life of building components resulting from the details of construction and the selection of products and materials.
- The effect of construction cost upon the motivations of owners and developers during the construction process.
- The documents, procedures, and sequence of events involved in the planning, design, and construction process, including the roles of the Designers of Record, construction contractors and regulatory officials.
- The methodologies involved in the selection and design of the individual component parts of all building systems.
- The methodologies involved in constructing the finished product.
- The telltale signs of poor construction quality, wear and tear, and failure of component parts to perform as required.
Selecting an Outside Consultant as Your Technical Representative
Many investment organizations do not have an in-house technical representative and utilize outside consultants exclusively for this purpose. For those organizations, there are two important issues to consider. First, the selection of the "individual" that is to perform the physical due diligence is of utmost importance. Second, the requested scope of work should be the product of an experienced technical representative who fully understands the aforementioned "list of issues."
Most organizations that utilize outside consultants exclusively as technical representatives choose a "firm" that performs this service. The firm is then hired to conduct a specified scope of work and produce the property condition report. Typically, the principals of the firm then select the individual or individuals to perform the work. The work is performed and the report is produced.
Not all individuals who perform this work are equally experienced and skilled. A non-technical manager who is responsible for engaging the services of consultant technical representatives should look to the credentials and knowledge base of the "individual" who is to perform the inspection at the property. Hiring for services should always involve the selection of the individual within the firm. Don't be assuaged from this because you are told that "a principal of the firm is assigned to supervise the work." Of utmost importance is the knowledge base of the person that performs the inspection. This above all else will determine if all of the physical risks of a proposed investment have been identified.
As a minimum, the resume of the individual should be reviewed, a sample report prepared by the individual should be received, and a phone interview (or personal meeting) should be conducted. Questions should be devised loosely from the "list of issues" that represents concerns most important to your organization. The choice of the technical representative should hinge upon the individual's knowledge base, the skill exhibited in their work product (sample), and their ability to communicate in a clear, concise and satisfactory manner.
Though this exercise may seem like a large effort, it will become routine once established and need not be repeated too often. When the right individual has been found within a firm, it is an easy task to request their participation in your projects. You will find great satisfaction and comfort in the accuracy and consistency of work product from having the "right" individual perform your work.
It is usually easy to identify a scope of work for performing physical due diligence that has not been prepared by an experienced technical representative. Many such work requests do not properly represent the nature of physical due diligence as "observation, opinion and verification of specific critical items within a limited, specified scope." The work requests do not reflect recognition that specialized work items should only be performed if there is an identified need resulting from a "base" due diligence inspection and review. Many ask for the achievement of work products more appropriate to the original design process, without recognizing that the information needed for the analysis may not be obtainable. Besides lacking the correct "jargon" and a comprehensive (and appropriate) scope of work, often such requests for services include the performance of tasks and the completion of work products that are costly and provide meaningless results and conclusions. As an example, I have seen a request for services that called for a general proposal for uniform costing nationally (the cost is known up front before the actual property to be inspected is selected) with a complex scope of work that included:
- Review of design load calculations of all vertical and horizontal loads in seismically active areas (not considering that these calculations may not be available from the Designer of Record).
- Provide costs to structurally upgrade to a specified loss percentage (this would require a major structural analysis, yet the return period for the seismic event was not specified – thus, results would be meaningless).
- Obtain certifications from Designers of Record that the building has been properly designed (as if the designer would ever provide such an instrument at the mere request of a consultant).
- Identify any current code violation whether on record or not (verification of current code violations requires extensive study and is likely irrelevant due to the grandfather laws of most states).
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