How to Protect Yourself from Hidden Mold Problems During a Purchase of a Hotel

A typical hotel transaction process includes a property condition assessment (PCA) and can also include a Phase 1 Environmental Report. Unbeknownst to most, significant gaps occur in the process because while these assessments usually identify the existence of damage, they never identify the extent, cause, or cost to recover the damage.

Buyers negotiate the purchase price for a hotel based on the information available from the PCA and Phase 1 Environmental Report, but often fall short because these assessments do not cover the true extent of the damage. As a result, many new owners acquire a property that requires significantly more money than expected to remediate the hidden damage, in addition to taking on the costs associated with extended room outages. They are left with the choice to either pay for the extra remediation costs out of pocket, or else file a claim with the insurance company in the hope of recovering the cost after the sale.

How to Plug the Holes in the Transaction Process

An investment group purchased a high-rise guest tower hotel in the Southeast United States. The hotel was over 30 years old, and its major equipment was in the run-to-failure mode. The PCA identified the major building systems and their remaining useful life. The Phase 1 Environmental Report identified (on the surface, through non-destructive testing) that there was some physical damage in the form of moisture and mold.

The hotel transaction process is very prescriptive in regards to the PCA; an ASTM standard for the PCA requires it to identify and communicate physical deficiencies of the property. However, it does not uncover any failures that have occurred due to the interaction between the HVAC and building envelope systems, nor does it recommend how to fix them other than equipment replacement. Replacing equipment is not always the best solution because this strategy doesn’t address the cause of the deficiency, which means the same issues will likely recur again. This widespread industry problem has reared its head for decades and needs to be brought to light and addressed.

In this particular case, because the equipment and systems were in the run-to-failure mode, surface damage was masking more wide-spread damage. The evident damage was just the tip of the iceberg; the full extent of damage as well as its underlying causes were never detected.

The new owners hired the same company that had performed the Phase 1 Environmental Report to conduct a more extensive investigation of the problem in an attempt to pinpoint the cause and provide solutions. After this company performed their additional (and expensive) investigation, they provided the owners with a list of symptoms determined by taking the hotel’s vital signs. As an environmental firm, they specialized in taking readings and measurements of the rooms, which confirmed the damage but didn’t provide the owner with the cause, or more importantly, the solution. Thus, after this additional assessment, the owners were still left with unanswered questions, and with little direction about what to do next.

Once Liberty was retained to investigate, we were able to bring the multi-disciplinary resources required to solve complex mold and moisture problems similar to the conditions found in their hotel. Our extensive experience in hot and humid climates, as well as our intimate knowledge of the interactions between the building envelope and HVAC systems, allowed us to not only strategize a work plan and method statements that confirmed the defects leading to the failures, but also to identify the extent of damage to help support cost recovery after the sale.

Preventing the Problem from Recurring is Key

If remediation efforts are not methodically planned and executed, the consequential effects of these types of failures can drive costs up into the seven-figure range. Our client’s two most important objectives were coincidentally our two biggest challenges. Our first task was to identify the root cause of the issue and strategize a solution that would FIX and SOLVE the existing problem efficiently and PREVENT it from recurring. Every day that went by with unoccupied rooms was compounding lost revenue for our client, so the pressure to get these rooms ready for occupants was severe. Secondly, our client’s goal was to accurately document their insurance recovery after the sale. Since the prior assessments didn’t identify the full extent of damage, the discount negotiated in the purchase price wasn’t enough to help offset the needed repairs.

Multi-Disciplinary Solutions Were Required

The following defects contributed to causing the damage: negative pressure by the HVAC; a leaky building envelope; inadequately dehumidified make-up air that did not effectively reach guest rooms; inadequately sealed chilled water pipe insulation transverse and longitudinal joints; and the absence of supply air above the top ceiling in areas where the designed thermal and air barriers were on the underside of the roof. None of these major issues had been uncovered by the PCA or the Phase 1 Environmental Report. Had our client known about these issues prior to purchasing the hotel, they would have negotiated a better price to offset repairs.

Our client now realized that the systems and procedures in place to supposedly protect their investment during a hotel transaction had in fact failed them. Their goal had been to incorporate the cost of renovations into the transaction, but because the new owners had already exceeded that amount, they were going to attempt to self-fund the repairs. Since the necessary repairs had been grossly underestimated, the cost continued to escalate far beyond their insurance policy deductible and they needed guidance to document their insurance recovery.

Understanding the interaction between the building envelope and HVAC system, Liberty experts were able to diagnose the failures and determine a solution for recovery. The proposed solutions were provided in a matrix form, offering “good,” “better,” or “best” options that all met the dehumidification requirements for the space but allowed the client to make the best business decision that aligned with their goals for the property. For example, provided options to minimize conditions conducive to negative pressure within the guest rooms ranged from installing constant flow regulators in the rooms, to converting the continuous exhaust system to a non-continuous exhaust system.

An additional challenge was that the hotel had to remain operational during remediation. Very rarely do hotels shut down because of moisture and mold. The remediation approach had to address the mold while simultaneously making repairs to major mechanical equipment without inconveniencing the hotel guest. For example, the vapor retarder on the insulation of some chilled water lines was damaged beyond repair.

The working sequence during replacement was very important, and condensation had to be controlled to prevent further mold growth. There were very specific requirements for both the type of insulation to be used as well as the types of mastics and sealants that were conducive to the environment in which this work had to be done.

Hidden Mold = Hidden Costs

The buyer’s primary goals were to maximize recovery costs, minimize room outages, and get rooms operational again in a short amount of time. They worked with Liberty and their insurance company to accurately document recovery, going off a set of options to mitigate the problem using information provided to them in the initial assessments.

Through the process, they gained a heightened awareness of the patent and latent defects that did not rise to a level of concern during the initial assessment phase. The remediation project was successfully moved along to get the rooms operational quickly and help document the new owner’s insurance recovery.