Building codes and enforcement: Tools for a profitable commercial real estate investment

By Narendra Srivatsa September 30, 2014

Narendra SrivatsaLocation and the reputation of a property are key to making sure a commercial real estate transaction is profitable. Location refers to the attractiveness of a property based on where it is physically in a community; proximity to public transportation, shopping areas, and places of interest; any historic designation; and other factors. Location also has another side that deserves serious consideration: the potential effect on the property of both natural and man-made catastrophic events.

The commercial real estate industry often dismisses events such as earthquakes, floods, industrial spills, crime, windstorms, and snowstorms as insurance issues. Lenders and investors frequently take a “why worry, it’s covered” attitude. But catastrophes can create profit and loss issues for commercial real estate assets. The time and cost to rebuild and return tenants to occupancy result in increased expenses, lost rent, and damaged reputations — all of which can lead to short- and long-term losses in income and property value.

Built to code

Local building codes and zoning ordinances typically set the baseline standard for commercial construction in a jurisdiction, and builders rarely go above that standard in any substantive way. Aside from superficial trappings and design elements, the code often determines the true reputation of your commercial property.

What’s the effect of building codes and their enforcement for an individual owner, investor, or lender? To answer that question, you must know whether the code is truly appropriate for the location and, if so, whether the code is actually enforced. If you assume that areas susceptible to natural hazards have building codes that always meet those standards, you’d likely be wrong. Some of the most historically vulnerable parts of the United States, such as Tornado Alley, have some of the weakest codes related to high-wind sustainability.

Quality and reputation

Poor codes or insufficient enforcement can reduce the quality and demean the reputation of a property. It’s possible that two adjacent buildings were built to different codes and subject to very different levels of code enforcement. The one built to a higher standard is probably maintained better than its neighbor, even though they may look the same during walk-throughs.

Which one will stand up to the elements better or suffer less severe structural damage? After a catastrophe, which building would have a shorter downtime and lower loss of income? Which building has a better baseline for reconstruction work or has lower operating expenses, insurance costs, and ongoing repair costs? And which building deserves a reputation for quality and can command a higher, more stable income stream?

Insight

Our ISO Community Hazard Mitigation assesses building codes and code enforcement for about 20,000 jurisdictions throughout the United States. The Building Code Effectiveness Grading Schedule (BCEGS®) program assigns each municipality a grade of 1 (exemplary commitment to building code enforcement) to 10. It also provides a benchmark comparison to comparable buildings in the state or nation. Originally developed to serve the insurance industry and participating municipalities, BCEGS information is now available to lenders, owners, and investors as part of Verisk Commercial Real Estate’s Enhanced Zoning Report and Commercial Building Insight Report.

BCEGS gives you an objective, unbiased view to complement, reinforce, or challenge the impression you get from a building walk-through. A BCEGS score used wisely as part of the due diligence process can help provide more in-depth information and insight regarding a property’s value or anticipated income, estimated repairs if damaged, its vulnerabilities to catastrophes, and marketing approach.

For more information on this low-cost tool and how BCEGS can assist you in your next commercial real estate transaction, go to www.verisk.com/cre or e-mail cre@verisk.com.


Narendra Srivatsa

Narendra Srivatsa is the assistant vice president of product development for Verisk Commercial Real Estate.