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Assessing Physical Aspects

As with buying residential real estate, first impressions of a retail center can start with curb appeal, including observing architectural design, landscaping features, and general aesthetic beauty. However, peeling back the curtain on a seemingly gorgeous property can reveal deferred maintenance, hazardous materials, and aging infrastructure that can kill a deal or a post-closing balance sheet. Our underwriting process investigates all aspects of the physical property to reveal the true value and predict its operational success.

We categorize our physical property analysis into three key areas: (1) Property Conditions; (2) Layout and Design; and (3) Compliance and Insurance Risks.

Property Conditions:

• Structural Issues: During the underwriting process we scrutinize the property for any signs of deferred maintenance and structural damage that could compromise safety or require substantial investment to remedy. Structural assessments of the buildings themselves (foundations, structure, roof systems, and facades) in addition to the overall site and utility services (stormwater systems, site lighting, asphalt and concrete) should all be evaluated by qualified engineers and contractors for their estimated remaining useful life.
• Repair and Replacement Costs: With an understanding of the repairs and replacements required, estimating these costs becomes the next challenge. Because regional costs can vary widely, we make a point to gather actual quotes from local contractors for the budgeting process. Both immediate and long-term expenditures should be accounted for as part of the annual operating budget, with capital reserves, or by negotiation of closing credits with the seller of the property.
• Building Systems: Evaluating the condition of critical building systems including electrical, plumbing, HVAC, and fire suppression is essential. Repairs and updates can be costly, and while leases may hold tenants responsible for building system repairs and replacements, we value a thorough understanding of these costs as this can weigh heavily on tenant’s ability and willingness to renew and extend leases.

Layout and Design:

• Operations:We consider whether the property’s design can accommodate the operational needs of both tenants and property owners. For example, tenants may require ample parking areas that can easily accommodate “buy online, pick up in store” programs and direct ingress and egress to loading areas can make shipping from stores simple and effective. For owners, an operational eye can inform potential changes to landscaping, portering and sweeping, security, and other services to improve performance, decrease costs, or both.
• Layout:A property offering rental units that are regularly shaped, a variety of sizes, with high visibility and opportunity for signage will have the ability to attract a variety of tenants. Certain layouts lead to space that is inconvenient and difficult to lease.  For example, in an L-shaped center, the interior corner (or “crotch” in real estate parlance) is often very difficult to lease because it usually provides inferior parking and store frontage.
• Aesthetics: A visually appealing property can create a positive first impression for consumers and potential tenants alike. Architectural details, overall design themes and landscaping features can contribute to the property’s identity and can make it stand out in a competitive retail landscape. Effective signage and wayfinding systems create a positive experience, making it easy to locate stores, amenities, and parking. Conversely, an aging or outdated property with a lack of aesthetic considerations will foster negative experiences that consumers will avoid.

Compliance and Insurance Risks:

• Hazardous materials: An environmental assessment of a property can identify issues such as soil contamination, presence of hazardous materials like asbestos, lead, and mold, underground storage tanks, groundwater contamination, and radon gas presence. These findings are crucial for assessing potential health risks and environmental liabilities, guiding necessary remediation efforts to ensure compliance with regulations and safeguarding the property’s value and usability.
• Zoning and Building Code: We conduct an in-depth analysis of the local building and zoning codes to ensure there are no existing violations. We also confirm that the property meets safety, health, and environmental standards, which can prevent costly legal issues and fines. Potential issues include insufficient parking space to building square footage ratios, unauthorized building extensions or modifications, failure to meet safety standards like fire codes, and lack of accessibility features required by law.
• Insurance: In today’s environment of rising insurance costs, we scrutinize properties through the eye of an insurance adjuster, evaluating risks such as uneven sidewalks, potholes, and insufficient traffic signs that increase the risk of accidents. Ensuring that fire suppression systems, including those under tenant responsibility, are inspected and meet the latest standards is critical for risk mitigation and insurance compliance.