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Due Diligence 101: Property Condition Assessments

Posted by Greg Bailey on 7/28/14 2:22 PM
What is a Property Condition Assessment?

Pop Quiz:  If houses get home inspections, what do commercial properties get?
The answer:  Property Condition Assessments – or PCAs, as they are commonly called.
PO QUIZ
Much like buyers, sellers, and lenders for homes need to know the condition of those properties, buyers, sellers, and lenders of commercial properties need to know the condition of those properties as well. A PCA is very similar to a home inspection, but on a much larger scale. You’ve probably known someone to have a home inspection done – or perhaps you have had one done yourself – so you know the basic drill.

An inspector comes out, checks everything in the house from the roof to the walls to the electrical systems. He then concludes if there are any problems with the current condition, and lets the seller/buyer/lender know about these issues and how much it will cost to fix any observed deficiencies. A home inspector will also let the homeowner or buyer know about any issues that are anticipated to occur in the future and how much they will cost to fix.

A Property Condition Assessment is similar to a home inspection, but on a much grander scale. (We’re talking office buildings, apartment complexes, industrial warehouses, hotels, hospitals, etc.) A PCA determines the present physical condition of the property and provides a professional opinion on any future anticipated recommendations associated with the property.  The Assessment includes a detailed cost table as part of a lengthy report.

And, there is a higher level of expertise required to perform a PCA for a commercial property.  The inspectors are typically architects or engineers, with college degree and beyond.  They are familiar with more complex build systems that are present in commercial properties.
 
Who needs a PCA?

There are three parties that are usually involved when a PCA is being conducted: the lender, the buyer, and the seller. Each of these parties has a reason for needing a PCA to be done on a property.

  • Lender: PCAs are often a requirement of a bank when lending money for the purchase of a property. The bank or lender needs to know what problems the building or property has and how much it will cost to fix them. These issues could affect the value of the property, or the ability of the borrower to pay their mortgage.
  • Buyer: A buyer wants to know any issues as well, and will likely use the PCA as a negotiation tactic if they will need to replace/repair certain things in the property.  If the PCA uncovers major, costly issues at the property, a buyer might even rethink the deal entirely.
  • Seller: A seller wants to know if they will have to fix anything in the building before they sell, and they also want to be able to correctly value the property. A seller could also use this as a negotiation tactic if the building was structurally sound and had no problems.
 
How do you complete a PCA?

There are four basic steps to completing a PCA:
 
1. The In-Person Interview

The in-person interview occurs at the very beginning of the process. The Project Manager (the person completing the PCA) will schedule to speak with someone at the property, preferably someone who knows about the building’s history and where its components are located. This could be someone from the building’s maintenance crew or even the owner of the building.

The In-Person Interview
 
2. The Physical Walk-Through

After the Project Manager conducts the interview, they will complete the physical walk-through of the property. The PM will go through the entire property and will take pictures and take note of the characteristics about the building like elevations, surrounding properties, site characteristics, building systems, and many others.

The Physical Walk-Through           The Physical Walk-Through

3. Research and Document Review

The PM will conduct research on the property. He or she will visit local agencies such as the fire department, the health department and the planning department to ensure compliance of the property as well as identify any known or past violations.
 
Research and Document Review
 
4. The Report

After the PM is has completed the research portion, he or she will then write the Property Condition Report, or the PCR. This report will outline all of the components of the building and their condition. It will notify the buyer/seller/lender if there are any issues with certain components of the building as well. This report will also include a Table of Probable Costs to Remedy Deficiencies in either the Immediate, Short Term or Reserve period of the loan. This table will list all components of the building and when the PM estimates they will need to be replaced or serviced in the future, and it will associate a cost with each of these components.

The Report

 
What happens after the PCA is completed?

After a PCA is completed, the due diligence provider completing the assessment will deliver the report outlining their findings in the property, which will include the assessment of the components of the building, research and historical data, and the Table of Probable Costs to Remedy Deficiencies. The due diligence provider will inform the property buyer, seller or lender about the associated costs and when parts of the property will need to be repaired or replaced. At EMG, we also include an easy-to-read summary at the beginning of all of our reports for your convenience. The due diligence provider conducting the PCA may also recommend a follow-up study after the initial PCA if they find a concern that needs further evaluation, such as an underlying structural problem where the cause is not readily determined. A PCA is a tool that allows the client to make intelligent decisions about a deal or the deal structure based on the condition of the property.
 

For more information, contact Greg Bailey, Director of A&E Technical Operations at EMG.
 

Topics: Property Condition Assessment, 101

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