The due diligence process should include a thorough review of the existing elevator equipment when considering the purchase of any building. The function of due diligence is to independently verify all representations made by a prospective seller, in addition to uncovering pertinent facts which have not been disclosed and are important to the buyer. Third party assessments of existing vertical transportation systems will assure the soundness of ones investment. In some instances, the process will shed light on situations that require immediate attention and hundreds of thousands of dollars to correct. In the evaluation of elevators, consideration should be given to safety, obsolescent equipment, code compliance, barrier free compliance, equipment condition, level of maintenance provided and ability of the system to serve the building.
In Ontario the B-44 Safety Code for Elevators requires a TSSA (Technical Standards and Safety Authority) licensed contractor to periodically maintain and inspect every elevator. The level of service provided varies not only between contractors, but also among service technicians who are responsible for specific locations within any one given company. Despite differences in levels of service, in principle, a “full service” maintenance contract typically offered by most contractors, should allow an owner to retain an elevator system continuously. Appropriate preventive maintenance and repair should protect an elevator from deterioration. Frequently, this is not the case and equipment is often neglected, badly worn, and in need of replacement, or modernization as it is more commonly referred to in the elevator industry. Although there are many variables and every scenario is independent of another, major modernization infers the replacement of most control and mechanical systems, which includes virtually everything in the machine room and hoistway.
The competitiveness of the real estate industry in today’s market has a significant effect on the modernization of equipment, as owners of older buildings strive to compete with newer complexes. In these circumstances, the basis for modernization is typically performance. Although an existing system may be fully operational, advances in technology allow for improved dispatching in comparison to older type systems. Also, it can provide as much as a 25 % decrease in waiting times without increasing elevator speed. In any modernization project, creating the initial plan to decide what remains and what is to be replaced is one of the greatest obstacles faced by an owner or property manager. With certain types of equipment, especially gearless hoist machines, major components are often retained and refurbished rather than replaced. Accurate advice is crucial to understand the level of technology that is being provided and what might be required to compete with neighboring buildings.
Elevator contractors commonly sight elevator obsolescence as an impetus for modernization. This is often the case following the sale of building and when the new owner assumes an existing maintenance contract. Contrary to this assertion, the main problem is that older systems are more labour intensive to maintain for service contractors, which leads to less profitability. As part of the due diligence inspection, an independent professional consultant can provide advice as to the availability of replacement parts. This may aid an owner in saving hundreds of thousands of dollars on an unnecessary upgrade. Also, it is always advisable to be cautious of assuming an existing service agreement without the prior advice of an elevator consulting firm or legal counsel.
A key point in reviewing existing contracts before the purchase of a building is the elevator maintenance agreement. As previously stated, these contracts are mandatory in Ontario and every building will have some form of service agreement. These contracts are most often 5-year term agreements and rollover for another 5-year term if not cancelled prior to the initial term. Cancellation periods are usually 90 days prior to the end of the term. In the event of a sale of the building, it is not uncommon for these agreements to include clauses that the contract must be assumed by the buyer. This is vital, especially if the existing contractor is providing less than adequate service and the equipment is in poor condition. Having a lawyer review the contract prior to sale is advisable, and the responsibility of terminating the contract should be left with the seller prior to closing.
As with every other aspect of a building, due diligence of the elevator systems will provide key information to minimize the risk associated with your investment.
Michael Morgenstern is a partner at National Elevator Consulting Limited.