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How to Hire a Condo Engineer: 4 Steps

How to Hire a Condo Engineer: 4 Steps

Hire condo engineerMake sure you actually need one, too

They don’t teach you how to hire an engineer in school. Indeed most folks have never had the occasion to hire an engineer or an architect in their whole life. This is also true for most condominium or HOA board members. So how does a condo board go about successfully hiring the right engineering firm for their upcoming project?

1. Evaluate the Need

Perhaps the first question to be asked is ‘do we even need an engineer?’ Not all projects do. Some repair projects are so straight forward and obvious the board can hire a contractor with the proper skills and run the project by a committee chair or a property manager who has expressed confidence she’s managed many similar repair projects. Some projects requiring some engineering expertise, such as replacing the common HVAC equipment or upgrading the common electrical systems, do not need an engineer to manage it but rather the right choice by the board would be to seek an HVAC or electrical contractor capable of providing ‘design/ build’ services for both a timely and economically satisfactory project.

The complexity of the project and criteria needed to be complied will determine whether an engineer is needed. Typical projects in this category will include designing a new storm water drainage system for the entire HOA; performing a reserve fund study; or evaluating and design of a new foundation for one or more buildings in the condo complex. It should be noted, the term ‘engineer’ in this article refers to a professional engineer (P.E.) licensed in the state of Maine. Though other unlicensed engineers can work on the project, only a licensed engineer can stamp (preliminary and final) construction documents for town planning board review; building permits; and other municipal requirements.

2. Selecting the Engineer

Once the need is determined, selecting an engineer is the next major step. The process starts with defining the project with a clear and complete description of the scope of work. Many property managers have the resources to provide considerable assistance to the board in developing this scope of work. While the scope of work is being prepared, a list of two or three engineering firm should be created. Clearly this list should be made up of engineering firms providing the services needed for the subject project. Here again the condo’s property manager can be a good source of finding the right firms. Similarly, engineers listed in the Condo Media’s directory can make this task relatively easy because the engineers listed will be firms with experience in not only the technical issues involved but also are familiar with the world of condominiums and their special needs.

3. Preparing the RFP

Once the potential list of firms is developed, a Request for Proposal (RFP) can be prepared. This document will utilized the defined scope of work to ensure all interested parties are preparing their responses with a similar understanding of the board’s objectives. Typical RFP’s have four major elements:

1) General Information for the Engineer
2) Technical Requirements
3) Criteria for Selection
4) Scope of Work Statement

On some projects it may necessary to invite the potential firms to visit the site for a tour to outline the issues or special conditions impossible to clearly delineate in the RFP. Following the distribution of the RFP to the listed firms, the board will screen the proposal responses; select firms it wishes to interview; and schedule the interviews (45 minutes to 1 hour) to allow both the engineering firm and the board to clarify any questions or concerns arising during the proposal preparation process.

4. The Interview and Contract Process

This interviewing process is most important. Typically, the principal or senior member of the engineering firm attends the interview giving the board a first-hand impression of the firm’s approach to this project; a clear commitment to the technical resources available for this project; and past relevant experience predicting a likely successful outcome. The interview also allows the engineering firm a better understanding of how the board will be making decisions and committing adequate representation to ensure proper administration of the project.

Following this interview the board should select it first choice for the project’s engineer. At that time the contract is negotiated. Often the contract is a direct reflection of the requirements of the RFP and the conditions and fee found in the engineering firm’s proposal. These negotiations on occasion will result in changes to the scope of work and the fee. If agreement cannot be reached on issues acceptable to the board, the board can begin discussions with their second engineering firm choice in order to feel comfortable with their selection. It is critical the board feels they have selected a firm they can work with and have confidence future communications and project outcome will meet their community’s needs.

Awarding the contract to the successful engineering firm is only the beginning. A kick-off meeting to introduce all of the project team members on both sides; a review of everyone’s obligations; and establish a clear line of authority and communications. In starting any major project, the board should always remember that just like dealing with a lawyer or a doctor, the engineer’s job is to provide competent technical information and solutions but it is the board’s responsibility to make the business’ decisions. History has shown a well- defined scope of work coupled with a board making timely decisions is a recipe for a successful project.

Article written by Jack Carr, P.E., R.S., LEED-AP, Criterium Engineers
Published in Condo Media January 2020 edition
Download a PDF Version of this Condo Media Article

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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.

Roger Russell
Senior editor, Accounting Today
https://www.accountingtoday.com/news/a-new-appreciation-for-bonus-depreciation
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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

REQUEST A PROPOSAL!

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:

SHOPPING CENTER EXAMPLE

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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Construction Specifications – Keys to a Successful Job

Managing a capital budget and expenditures for a community association involves greater responsibility and risk than it does for one’s own home – the key is construction specifications. This article addresses some of those differences and ways to control the process to assure a positive outcome and it starts with construction specifications.

Construction Specifications - Keys to a Successful Project!

As homeowners, when there is a major capital expenditure, like a new roof, we call a few contractors to get some competitive bids. Then, we ask a few questions, maybe check some references, and hire the contractor with the lowest cost that we feel will meet our needs.

As board members or managers of community associations, however, the jobs are larger and the money involved is far greater. This also means that the risks and potential liability are increased as well.

For example, the simple task of obtaining competitive bids can result in quotes that are widely divergent. Because costs are greater, the variation can be significant. Criterium Engineers has often been called by property managers to help explain why contractor bids are so far apart. The answer most often is that the quotes are not truly comparable. In other words, it’s not apples to apples.  In order to compare bids, we require detailed construction specifications, without them a project is likely going to fall off track and budget.

Roof replacement is one good example. Different contractors may choose different materials. One may remove the old roof; another may not. One may include costs for permits, disposal, and cleanup; another may not.

The way to get comparable bids is through a specifications process. It is also the way to get a job that meets your needs and perhaps considers money-saving alternatives. A specification prepared by a licensed Professional Engineer is almost certain to include elements that you may never have thought of and ultimately protect your interests as a manager, board member, and as an owner.

What are Construction Specifications?

Construction Specifications are a set of documents that define the scope of the job and the expectations for the contractor. Among other things, it generally includes:

  • Drawings that illustrate construction details
  • Documentation of:
    • All things that must be covered by the quote
    • The manner and format in which the quote is to be provided
    • Methods and materials to be employed (see below)
    • Conditions under which the work is to be performed (e.g., not before 8AM or after 6PM)
    • Required insurances
    • Form of agreement to be used
    • Warranties to be provided
    • Responsibilities of the association vs. the contractor
    • Procedures for effecting changes
    • Construction schedule
    • Terms of payment
    • Site conditions that must be maintained before, during, and after the work is complete
    • Standards and regulations that may govern the work

There are two types of construction specifications, generally referred to as Performance Specs and Prescriptive Specs. In a Performance Specification, the engineer lays out the expectations for the job, that is, how the systems and materials are to perform now and over time, leaving it to the contractor to identify those systems, materials, and method of installation to accomplish the objectives of the specification. For example, a Performance Specification for a roof could be as theoretical as that it must keep the rain out under all conditions and must last 20 years. In more practical terms, the specification may state the type of roof (e.g., EPDM) but decline to name the manufacturer, method of adherence, etc.

A Prescriptive Specification, as the name implies, lays out much more specifically how the job is to be done, what materials are to be used, and the manner in which they are to be installed. For example, a Prescriptive Specification for a roof would most likely list the type AND manufacturer, all details and methods of fastening, etc.

Engineers generally rely on a variety of standard specifications from entities such as the Construction Specifications Institute (CSI) and MasterSpec (AIA). These documents serve as a framework, providing boilerplate and standard clauses, but a true and good specification starts with a field visit to observe actual conditions, and then continues with research to select the right approach.

Value Engineering and Construction Specifications

Developing a specification is the perfect time to consider alternative approaches for the repair or replacement of key systems. Sometimes, a new approach can result in cost savings over the original design. At other times, a different approach may result in greater durability or reliability, thereby reducing costs over time, even though the initial outlay may be more expensive now. Value is the relationship between cost and benefit. Value Engineering, when properly done, is more specifically about the relationship between cost and function. It is generally a “like for like” substitution that generates a cost savings, either initially or operationally, without sacrificing function, intent, or performance of the original design. When developing a specification, the engineer can either perform the Value Engineering himself (Prescriptive Specification) or ask the contractor to propose alternatives (Performance Specification). Either way, the association wins.
Liability for the Board and Property Manager

One of the key differences between owning your own home and sitting on a board representing a group of owners is that you now have a fiduciary responsibility to those owners.

While most board members would not think of awarding a contract to someone just because he was a friend, it can be just as risky to hire any contractor if proper care in the selection has not been exercised. The engineer that developed the specification is also able to assist with pre-bid meetings, contractor selection, and kick-off meetings.

To illustrate how serious this can become, we were recently subpoenaed to produce documents in a case that involved shoddy work by a contractor. While the contractor is the key defendant, so are previous board members and the property manager. Being able to demonstrate that contractor selection followed an industry-accepted, professional, and objective procedure is your best defense in such a case.

Conclusion

Developing a specification for any significant capital expenditure is the best way to ensure comparability of contractor bids, a quality job, and avoid exposure to liability. The best part is, it may actually save money on the overall job. Specifications are developed by engineers or architects who are familiar with the design and installation of building systems. If chosen properly, that person could well be the same engineer who originally developed your reserve study and is familiar with your specific property. We would also strongly recommend hiring that same engineer to monitor the actual construction, repair, or replacement to ensure compliance with the specification. That’s why a local, experienced engineer is the best choice “For the Life of Your Association.”

Learn more about our Construction Management and Monitoring services.

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