Are You Buying a Building With Clay Foundation? Or Aluminum Wiring? Or Paper Roof?

When a commercial, retail, or multi-family housing property is in the acquisition process, the buyer or lender may request a Property Condition Assessment (PCA) to ensure due diligence and identify any significant deficiencies of the property to better comprehend the condition of the asset being acquired.

PCAs are included in the American Society of Material Testing (ASTM) standard guide, “ASTM E2018 Standard Guide for Property Condition Assessments: Baseline Property Condition Assessment Process, which was originally published in 1999. This standard was last updated in 2008 and is known as ASTM E2018-08.

The PCA only considers items that require significant maintenance or are costly to repair. As stated in the ASTM E2018-08, “opinions of probable costs that are either individually or in the aggregate less than a threshold amount of $3,000 for like items are to be omitted from the PCR. If there are more than four separate like items that are below this threshold requirement, but collectively total over $10,000, such items should be included.” Because Phase I Environmental Site Assessments (ESAs) indicate the likelihood of environmental liabilities being present based on the historical or present use of the property, PCAs are often completed concurrently with an ESA.

The PCA consists of a site walk-through and analysis of what was identified as deficient during the walk-through. The PCA evaluates the site and its general risks for drainage issues and aesthetics; the building elements such as walls, foundations, and stairways; operating systems such as mechanical and electrical systems; people mover capabilities such as elevators; and Life Safety considerations for ADA compliance and Water/Mold issues.

The general suggestion for a PCA is to evaluate 10 percent of the building; although sometimes this may not be a high enough value to achieve an accurate determination of all the deficiencies that would be part of the Property Condition Report (PCR). For example, utilizing a more specialized inspector familiar with ADA compliance would allow for a more thorough inspection of the height of the bathroom sinks to ensure the design is to code. Renovating the area to adapt the sinks to be ADA compliant could be a considerable and unexpected expense to the buyer or lender and may delay closing on the property, but this type of deficiency may be overlooked if only 10 percent of the building is assessed. The PCR should also contain a summary of the building’s overall condition, as well as present day and long-term maintenance costs as part of a “Cost Table.” Cost Tables are usually created to show a 12-year span, which is a typical Commercial-mortgage backed security loan term plus two years. However, the Cost Table can go significantly farther into the future if desired by the lender or purchaser.

Essel utilizes the knowledge of their architects, engineers and building inspectors to complete Property Condition Assessments and more fully understand the condition of the building. Essel prepares an “Immediate Repairs and Replacement Reserves Table” to enhance client understanding of how the condition of the building will impact the financial performance of the asset.

Property Condition Assessment