Archives for Commercial Engineering

Innovations Transform the Building Inspection Process

technology and innovations 2

Emerging technology and innovation are continually transforming the building construction inspection process. Criterium Engineers evaluates and adopts appropriate new technologies to provide additional knowledge and information for our clients.

Two inspection innovations in particular—the use of drones and thermal imaging—have been change drivers for Criterium Engineers in recent years, reaching areas that were previously unattainable by our engineering team.


Remote-controlled drones, also known as unmanned aerial vehicles, were first used by the world’s militaries to perform complex missions deemed too dangerous for humans. To achieve similar safety goals and reduce risk, drone use has been adopted by many industries, including Criterium Engineers 35 consulting engineering firms located across North America.

Using FAA registered drones operated by our licensed pilots, building inspections are now completed more efficiently, saving time and cost to our clients. They also help reduce health and safety risks to our engineers and technicians who no longer need to use ladders, scaffolding, and lifts.

At the same time, drones allow us to access and inspect areas that were previously impossible or difficult to reach building components, for example:

  • Entire façade of a high-rise building
  • Fragile terracotta or slate tile roofs in a multifamily housing development
  • Entire surface area of an industrial chimney stack
  • Views to exterior, difficult-to-access HVAC equipment and envelope penetrations
  • Building dormers, gables, skylights, cupolas, and other unique architectural features
  • Risk-prone areas that are common sources for water intrusion, like exterior transitions of materials from roof to exterior wall.

Our licensed, Professional Engineers inspect and document hard-to-reach areas for our clients and with each drone inspection we produce detailed written reports. The reports contain clear guidance on the current visual condition of building components, make recommendations, and may provide better accuracy on capital planning input. Inspection reports include high-resolution drone images and may include camera photos highlighting problematic areas that are taken during any related interior inspections.

Thermal Imaging

technology and innovations / reduce energy consumption


Another innovation originally developed by the military and used by our engineers and technicians is thermal imaging (also known as infrared scanning).

Thermal imaging is a cost-effective diagnostic tool that helps minimize the uncertainties in purchasing or maintaining a commercial building or residence. Thermography technology allows the certified technician to see the unseen and provide hard data to minimize the risk of difficult decisions. The careful interpretation of thermal images allows a forensic examination of a range of existing building components including:


  • Building envelope water intrusion
  • Exterior wall air leakage or infiltration
  • Missing or damaged insulation
  • HVAC equipment malfunctions
  • Electrical system component overheating/failure
  • Radiant heating or plumbing leaks
  • Flat roof moisture detection
  • Photovoltaic solar panel defects

Without thermal imaging, even the most experienced building inspection engineer is dependent on visual physical evidence such as water stains, surface warping, or building component failure before identifying a serious hidden problem.

When used in combination with blower door testing, which exaggerates building envelope component leakage, energy losses may be easily documented, and it is easier to discover thermal bridging in a building façade.

Thermal imaging is also used in quality control for buildings under construction or recently finished. It may discover a wide range of construction defects, identify potential sources for indoor air quality problems, mold, corrosion, and other moisture-related issues.

We’re Engineering What’s Next

The specific knowledge we gain with new technology and innovation allows our clients to review visual evidence and make informed decisions when purchasing, leasing, or repairing a building. As new technologies continue to evolve, Criterium Engineers will be at the forefront of studying and adopting the appropriate tools to continually enhance our work product for our clients. Learn about how you can become a Criterium Engineers franchisee.

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Your Roof: 8 Things to Consider!

Your Roof: 8 Things to Consider!

Image result for roof picture
If your house, condominium or commercial office building is like most built in the last 50 years, it probably has a sloped roof with one of the following roofing materials:
  • composition shingles
  • composite tile
  • cement or clay tile
  • wood shingles
  • metal roofing

Each type of roofing has its unique characteristics. However, there are also some common considerations to keep in mind:

  1. Life – The actual service life of a roof varies according to the location and exposure to sun and weather. You should not assume that the age determines its condition.
  2. Leaks – These are not usually the result of the roofing itself failing. Leaks usually occur due to the failure or improper installation of some related component such as flashing or underlayment.
  3. Resurfacing – When resurfacing a roof, you should strip the existing material to the sheathing to allow for a visual inspection of the sheathing, and replacement of all of the related components.
  4. Stains – If you have dark stains on a composition roof, it is probably mold. Diluted chlorine cleaners and products such as Shingle Shield are effective at removing the growth. New shingles are more fungus-resistant than some of those manufactured in the 1980s and ‘90s.
  5. Trees – Cut back overhanging tree limbs. They can wear a hole in your roof from the wind blowing through the trees.
  6. Gutters – If you have gutters, keep them clean. Gutters full of debris are far worse than no gutters. Debris encourages fungus, which can infect the roof sheathing. Rot and mold are the result.
  7. Wood – If you have wood shingles, make sure that they are treated for fire resistance and that the treatment is kept current.
  8. Clean – Keep your it clean, especially the details around skylights, dormers and valleys, and take note of any change in shape – this is where leaks start.

Your roof has an important job to do—to keep you dry in all kinds of weather. If you take care of it, you will get the most reliable protection and longest life.

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A New Appreciation For Bonus Depreciation

Under the Tax Cuts and Jobs Act, bonus depreciation now applies to both new and used property, and includes rental real estate. This change encourages more real estate investments, as well as investments in used equipment, according to Tom Wheelwright, a CPA and CEO of WealthAbility.

“And it means that much property can now be written off completely in the year the property was acquired, even if the property is not new,” he said. “Unlike the Section 179 deduction, there is no income limitation on bonus depreciation.”

The TCJA increased the bonus depreciation deduction for real estate investments from 50 percent to 100 percent for qualified property that is acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023, he noted.

For section 179, the TCJA increased the maximum deduction from $500,000 to $1 million, increased the phaseout threshold from $2 million to $2.5 million, and expanded the scope to include certain improvements to non-residential properties after the date that the property was first placed in service, Wheelwright observed.

“Along with equipment such as computers and machinery, the Section 179 deduction has expanded to include roofs, HVAC units, and fire alarms and security devices for non-residential properties,” he said. “These purchases are all deductible when purchased rather than depreciated over many years. Instead of deducting them through normal depreciation, taxpayers are now able to deduct 100 percent of the cost for the year they were added to the property.”

There is some confusion over bonus depreciation versus the Section 179 deduction, according to Wheelwright. “The application of bonus depreciation to real estate is confusing to practitioners because this is a new concept,” he said. “Bonus depreciation now includes new and used equipment, furniture, fixtures and most land improvements. Historically, it has only applied to new equipment, so previously practitioners have relied on the Section 179 deduction for used equipment.”

“For 2018 tax returns, I rarely saw real estate investors or business owners use the Section 179 deduction,” Wheelwright commented. “If there’s a choice between bonus depreciation and Section 179, bonus depreciation tends to be better, especially since there is no recapture if the property is converted to personal use.”

“Here’s where it can apply to any real estate investment,” he said. “Let’s say you’re renting the real estate or use the real estate in your business. As long as you bought it after Sept. 27, 2017, you can use bonus depreciation for new or used property.”

Cost segregation is a necessity, Wheelwright cautioned: “I’ve been shocked that there are practitioners who actually think that cost segregation is aggressive. If you read Code Sections 167 and 168, they say a cost segregation study is technically required. It’s actually always required, because you are supposed to reduce your cost basis in your asset by ‘allowed or allowable’ depreciation. So if you didn’t take full depreciation, you technically should reduce your basis by the amount that would have been allowed if you did a cost segregation and and had taken full depreciation.”

When you buy real estate, you’re actually buying four things: the land, the building, the land improvements and the contents, Wheelwright explained: “Bonus depreciation can apply to anything that has a useful life of less than 20 years. Land improvements have five-, seven-, and 15-year depreciation periods, so they are all subject to bonus depreciation in the first year.”

The potential savings are significant. “For example, your client buys a fourplex for $1 million. Typically, as much as 30 percent of the price would qualify for bonus depreciation,” he said. “This means they could end up with a $300,000 deduction the very first year. Consider the fact that their down payment was in the neighborhood of $200,000 — suddenly, real estate is a whole different animal as far as investing than it used to be.”

The passive loss limitation is the biggest question that comes up for bonus depreciation on real estate, Wheelwright noted. “So if you have a passive loss from real estate, you have to create passive income,” he said. “For example, your client owns an S corporation that is their primary source of income. They are probably active in that business. Let’s say that same client owns investment real estate which is a passive investment. All that means is that we now need to convert the active income to passive income.”

“Whether income from a business is active or passive depends on the activity of the owner in that business,” he continued. “If a child or a parent owned a portion of that S corporation and owned a portion of that real estate, the income from the S corporation would now be passive to the child or the parent and the real estate loss would be passive to the child or the parent. Now we can offset the loss from the real estate against the income from the business.”

“Always guard against the thought that passive losses are not deductible. Remember that they are deductible — against passive income,” Wheelright concluded.

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A Pre-Lease Property Condition Assessment Pays For Itself!

Criterium-Hardy Engineers provides the straightforward evaluation required for an extensive Pre-Lease Property Condition Assessment (PCA) for clients looking to lease buildings of all sizes. They are especially useful for Triple-Net Lease negotiations.

Be Informed!

Investing in due diligence and being an informed lessee provides greater confidence in the property, quantitative information for tenants, as well as peace of mind that the property will be appropriate for our client’s expectations.

  • Understand the property’s baseline condition
  • Solid information to make decisions on repairs or replacements, especially for Triple-Net Lessees
  • Detailed information to share with tenants
  • Saves time, money and establishes a baseline, which may minimize conflict with the building owner
  • Benefits all parties involved in the transaction


What is a Pre-Lease Property Condition Assessment?

  • Customized for the client’s business purpose
  • Used in support of real estate transactions
  • Commissioned for lease negotiations and, at times, upon termination
  • Provides an accurate condition of the asset
  • Offers an opinion on the building’s useful life
  • Outlines the probable costs required to repair or resolve any building issues

Details in a Customized Pre-Lease PCA Include

  • Representation of the property’s physical condition, including: property description, site improvements, and building systems
  • Outline of capital needs and opinion on probable costs: short-term repairs or replacements and preliminary capital budgets for the future
  • Recommendations for further study
  • Baseline data to resolve deficiencies and issues
  • Digital photography and informative reference exhibits/documents

Reports vary in length (often exceeding thirty pages) and are based on building size and complexity—for example a report prepared for a 35-story downtown office building, differs greatly from that for a 1,800 square foot retail space.

The average building PCA reviews more than 30 major building and site elements in great detail. It provides descriptions, deficiencies and recommendations. It also includes probable costs for repair or replacement of damaged or failing building systems or safety issues. PCA reports are customized for each client and may be designed to focus on areas that otherwise may not be covered in a baseline assessment.

What Does a Pre-Lease Property Condition Assessment Cost?

$3,000-5,000 (average) and long-term savings: tens of thousands (on average)

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Cost Segregation Studies

Taxpayers who spent at least $500,000 to purchase, build or renovate a building in the last 15 years may be sitting on a huge tax benefit. How do they find out? They do a cost segregation study.

Depreciation enters significantly into the financial performance of commercial buildings. Typically, property, exclusive of land, is depreciated over 39 years. Certain improvements or renewable materials (e.g., carpets) may be depreciated more quickly. These calculations have been part of the financial landscape for years.

What is not as generally known is that many of the costs embedded in a new, or even an existing, building can be segregated into categories that also allow for more rapid depreciation. This tax benefit is not new but is often overlooked by building owners and even many of their accountants.

If you own a commercial or apartment building that has been bought, built or reonovated recently without a Cost Segregation Study (CSS), you may have missed a significant opportunity for cash savings.  the good news is, you still may be able to utilize this modern tax planning tool.  CSS is the latest element added to the typical due diligence process of having a consulting engineer perform a building inspection with an optional environmental site assessment.

Whereas due diligence focuses on reducing future liabilities of physical or environmental problems with a property, a CSS focuses on impriving the project’s cash flow through reclassifcation of the property’s asset lives with the purpose of accelerating depreciation expenses, and thus lowering federal taxes.

The benefit of a CSS can be substantial, with potential net present value savings of more than $50,000 for every $1 million of property value.

Even if years have passed since purchasing the property, the IRS allows the taxpayer to recapture lost depreciation all in one year without having to file amended returns by simply filing Form 3115 to notify the IRS of the change in accounting after the retroactive CSS.

Though the advantages of improved cash flow in the early years of a real estate investment are obvious, many side benefits of a CSS are realized in multi-tenant properties.

When a tenant prematurely vacates a space, a CSS can be used as the basis to document the value of the space’s assets to be written-off and to use the tax savings to fund marketing of the space or future tenant fit-up.

All real estate investors have different tax circumstances, therefore, it is very prudent to obtain the advice of your tax consultant before initiating a CSS.

Most of the area’s commercial brokers and accounting firms are becoming familiar with this powerful tool.  After a little research, the rewards can be very worthwhile.

What is the purpose of Cost Segregation Studies?

Cost Segregation Studies (CSS) are designed to provide a defensible document to support accelerated depreciation of real estate. The purpose is to reclassify 39-year assets to more tax-favorable asset classes with 5-, 7- or 15-year lives. By converting “brick and mortar” assets (depreciated in a straight-line method over 39 years) to “personal property” assets (depreciated on a double-declining basis over 5 years), the real estate owner receives earlier tax depreciation expenses, thereby improving the cashflow from the property. The benefits of a CSS are best measured in Net Present Value (NPV) savings. Typical examples of personal property include architectural millwork, electrical and plumbing supply to personal property, movable partitions, security systems, exhaust equipment, decorative lighting, emergency generators, land improvements, signage, wall and floor coverings and window treatments.

The table below provides an example of potential savings:


Personal Property 5 yr 200% db 0% $600,000 12%
Personal Property 7 yr 200% db 0% 0%
Land Improvements 15 yr 150% db 0% $1,000,000 20%
Real Property 39 yr sl $5,000,000 100% $3,400,000 68%
_________________ __________ _____ __________ _____
TOTAL $5,000,000 100% $5,000,000 100%
Deferred Taxes: $475,755                              NPV of Taxes Deferred: $253,127

What is the basis in law for CSS?

Cost Segregation Studies began to be performed in earnest following the IRS issuance of Rev. Proc. 96-31 in 1996, which allowed taxpayers to correct mistakes in the depreciation of their assets. After several minor tax court cases were found in favor of taxpayers using CSS methods, the IRS accepted this procedure. What gives the true strength to the taxpayer’s position is that the tax courts have ruled that the case law created for the Investment Tax Credit, before the ITC’s demise in 1986, is applicable to CSS methods. As a result, CPAs have felt comfortable with the estimating and asset life reclassification that occurs in a CSS report.

When should a CSS be performed?

A CSS is most applicable to buildings that are newly built, newly acquired, or about to be acquired. Newly constructed buildings are ready candidates because material and construction costs have generally been calculated already. Recently acquired existing buildings are also good candidates if a significant amount of depreciation has not already been taken. Even after a few years, assets that should have been reclassified can be recaptured in the current tax year. A CSS also makes excellent sense during the due diligence phase for new acquisitions. At the time that they perform a Property Condition Assessment (PCA), your consultant may also be able to perform a CSS. This approach not only saves times and money, and sets you up to depreciate your asset properly from the beginning, it also may factor into the purchase price, enabling buyers to be more competitive.

What types of properties benefit most from a CSS?

Real estate investments best suited to undergo a Cost Segregation Study include:

  • real estate construction valued at over $1 million
  • building acquisitions or improvements
  • new buildings under construction
  • existing buildings undergoing renovations or expansions

Properties with the best savings potential include:

  • office buildings
  • shopping centers
  • restaurants
  • hotels
  • warehouses and distribution centers
  • manufacturing and industrial plants
  • medical facilities

Who can perform a CSS?

The IRS requires a detailed study by “experts” to support claims for shorter recovery periods. These experts must be judged as independent (performing Cost Segregation Studies on your own is strongly discouraged) and have the credibility to be able to estimate costs reliably. That is why most Cost Segregation Studies are performed by engineering companies, often in concert with an accounting firm or the client’s CPA.

What is the process for performing a CSS?

The CSS can be conducted in parallel with a Property Condition Report, an Environmental Site Assessment, or done independently. An engineering firm reviews available site plans, construction drawings, purchase documents, and other information to assign values and classify the assets. Through site visits and document reviews, a determination of the value of the land and building is made. The CSS team then “dissects” the property to identify all personal property, reclassify the assets, and develop engineering estimates of their value. This includes estimating building systems that are not visible such as buried utility systems and those hidden behind walls, floors and ceilings. Soft costs that are capitalized are also considered in the reclassification analysis. All personal property assets are categorized as needed, and tabulated into summary statements for the client’s CPA to use for tax filing. Results for the current tax year for new purchases are entered per Rev. Proc. 2002-19. For a prior year’s purchase, there is no need to amend the prior year’s returns or K-1s. The CPA files an “automatic” Form 3115 to advise the IRS of the method change. Please call Criterium Engineers for a quote.

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.

More information on CSS and you can check out our Cost Segregation Study services

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Commercial Building Inspection – PCA Due Diligence

Buyers of commercial real estate are concerned with the financing and economics of their acquisition.  Until recently, the condition of the building was only a relatively minor concern.  That is changing with PCA due diligence.

The initial impetus for carefully evaluating the condition of the building were the failures and foreclosures at the start of the decade.  Financial institutions were forced to deal with buildings that were not maintained and needed substantial work.

Next, regulations such as The Americans with Disabilities Act (ADA) created certain imperatives for building owners to upgrade facilities.  Seismic codes were, and continue to be re-written.  New environmental and ecological concerns surfaced.

Then, changes in the way buildings are financed created a need for a more formal and complete look at the condition of the building and the capital reserves required to maintain it.  As more commercial mortgages are securitized, the rating agencies on Wall Street – Moody’s, Standard & Poor’s, etc. – now require that property condition surveys be part of the due diligence process.


The Evolution of a Practice

The first type of engineering service to be almost universally required was the Phase I Environmental Site Assessment.  Initially, there was no standard for the service.  Vague requirements made it difficult for commercial developers, owners, and financial institutions to be confident that their environmental due diligence would be defensible in court.  Enter the American Society for Testing and Materials (ASTM) and the development of E1527: Practice for Environmental Site Assessments.

Property condition surveys and reserve studies have not yet become so standardized.  Firms in the business, each have their own format.  Each financial institution has their own scope.  FannieMae and FreddieMac individually created their own guidelines for multifamily properties.

Appropriate qualifications have not been defined.  Financial institutions require firms are acceptable to the rating companies.  The rating companies look to the financial institutions to select qualified firms.  Finding the best firm for the job can be difficult.

But things are changing, just as they did for environmental inspections.  The effort at standardization is being driven by the rating companies themselves.  Standard formats have been developed.  Most engineers in the field are aware of these formats and can provide them in a timely fashion.

Such consistency enables the engineer to understand the scope of services requested, and makes it easier for all to review the reports.  Some of the key features of the engineering study are:

  • A review of documents, interviews with owners and occupants, and a site visit
  • The development of a list of current deficiencies and a list and schedule of repair/replacement costs for building components, and a projection of these costs during the life of the mortgage plus two years.
  • Commentary on the condition of the building and any observed or recorded code violations or safety hazards.


What to Expect in the Future of PCA Due Diligence

With PCA Due Diligence, clear expectations for both environmental and engineering services, commercial building owners, buyers, and financial institutions can expect to see some significant changes in the way service is provided.

First, necessary services are being consolidated under one roof.  Buyers can now purchase both engineering surveys and environmental assessments from the same company.  Consolidation simplifies the process, reduces costs, and shortens the time frame in which services are provided.  Criterium Engineers has offered both services for a number of years.  Firms are looking to consolidate other services as well, such as appraisals and surveys.

The second trend is to provide broad geographic coverage.  Firms experienced in this work have tended to have only one or a very few offices.  That required that they send people all over the region or country.  The result was higher cost and lower quality since the engineer was not necessarily familiar with local conditions.  Companies that specialize in this work are now trying to build networks to cover broader geographic areas.  The Criterium network of 65 national offices – 6 in northern New England – is a perfect vehicle for providing high quality, rapid and consistent service, at an affordable rate.


How Can I Be Sure of Getting the Best Service?

There are a number of things that owners and buyers can do to ensure the best and most expedient service.

  1. Ask whether the engineering firm is familiar with the due diligence requirements for Commercial Mortgage Backed Securities (CMBS), Real Estate Investment Trusts (REITs) and the like.  Even if you are not going this route, the financial institution may use the standards of the rating agencies when reviewing your application.
  2. Inquire as to the qualifications of the individual doing the work; the person on site. Some firms, in trying to provide broad geographic coverage, may use poorly qualified or inexperienced individuals.  The eyes and ears of the engineer are the most valuable part of the service.  And be sure to inquire if licensed engineers or architects are being used.  There is a difference.
  3. Be sure to provide accurate and reliable information to the engineer. Construction drawings, maintenance records, and access to maintenance staff should all be readily available during the site visit.

Learn more about our PCA services.

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