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Why PCAs are a Valuable Tool for Investors and Lenders

Property Condition Assessments (PCAs), also known as Property Condition Reports (PCRs), are assessments used by those in the commercial real estate industry to determine the condition of a property, and what it will cost to maintain it in the coming years.  By taking into account the expected useful life of various key building systems (such as the roof, HVAC systems, MEP systems etc.) building assessors can provide an estimate timeline and cost of required maintenance.

Who needs a PCA?

Property Condition Assessments are an important document for those buying, and well as those lending on commercial real estate assets.  For investors, the PCA is a core component of the due diligence process because they need to fully understand the condition of an asset in order to quantify the immediate and long-term risks associated with the purchase.  The Property Condition Assessment can be used to negotiate on the purchase price (just as residential home inspections are), or to inform budgeting and asset management strategies. For these clients, an “equity-level property condition assessment” will provide critical information about any costs or liability concerns relating to owning a property.  With a lot at stake, investors can benefit from an in-depth assessment that utilizes a number of different, specialized professionals to evaluate the various building systems.

Lenders typically require the completion of a property condition assessment for their underwriting files prior to issuing a loan on a commercial real estate property.  It is a critical component of risk management, as the PCA provides the lender with important information that may affect the borrower’s ability to repay the loan (i.e. what are the immediate and deferred maintenance items the borrower must be able to fund to operate, maintain and update the property over the course of the loan?) This offers some guarantee to the lender that the loan will be paid back and that the site will not lose value in case it has to be sold in order to pay back the lender.

What happens during the Property Condition Assessment?

The standard Scope of Work for a PCA follows the ASTM E2018 standard, which includes an on-site walk-through survey, interviews and review of documents regarding the age and condition of property improvements.

During the PCA assessment, the professional will first perform research on applicable building code, zoning code, fire code regulations, etc. They also review the public archives, construction documents, and up-to-date finances that are available to them. After they have completed their research, the PCA professional will conduct a site visit where s/he looks at various building systems including the structure, roof, HVAC system, parking and MEP system.  These items are categorized and presented in tables of the short-term capital expenses (Immediate Repairs Table) and long-term capital expenses (Replacement Reserves Table).

Something that is considered an Immediate Repair items either violates code or is dangerous, whereas things that are categorized as Replacement Reserve items are nearing the end of their useful life and will need to be replaced in the short or long term.

Depending on the intended purpose of the PCA, a client may elect to add additional scopes to the assessment.  For example, a Green Property Condition Reports, which incorporates components of an Energy Audit into the assessment can provide valuable insight on how to increase operational efficiency of an asset.

Why should you get a PCA?

Due Diligence is all about understanding the risks associated with property transaction, and managing those risks. The PCA is an important tool to help you be an informed buyer or lender, to prevent unwelcome costs or issues down the track.  The PCA provides a cost-effective way to help you understand costs and risks associated with an asset, and investing in a property condition report is a small price to pay to get a clear picture of physical risks an asset might pose.