Property Condition Assessment or Property Condition Report
A Property Condition Assessment, or Property Condition Report, is a professional evaluation of a property’s physical condition from an engineering and construction standpoint. Property Condition Assessments are also referred to as a “PCA Reports,” and include conclusions and recommendations pertaining to the unforeseeable costs, financial liabilities, and acquisition risks about the site. Moreover, PCA Reports entail a comprehensive inspection of a site and note any defects that may affect property value. These reports also conform to an official standard, set forth by the American Society for Testing and Materials (ASTM). Typically, PCA reports are also overseen by specialist engineering license holders. Updated May 11, 2020.
Why do I Need a Property Condition Report?
Typically, there are three applications for PCA reports: (1) real estate due diligence; (2) loan qualifications; and (3) landlord and tenant property evaluations. In due diligence applications, a PCA report discloses material deficiencies at a site for buyers and sellers. This may also be performed alongside a Phase 1 Environmental Site Assessment Report. Whereas in loan qualification applications, PCA reports aid lenders for risk assessment purposes. Lastly, Property Condition Assessment reports also can document the state of a property upon the commencement or termination of tenant occupation. For example, when a long-time tenant of a warehouse moves out, a PCA can document the condition of the property upon the end of their lease.
What Does a PCA Cover?
The purpose of a Property Condition Assessment is to observe and document material and building system defects, that might affect the value of the property. Consequently, the current state of a property undergoes a detailing observation. This comprises an evaluation of the appearance, quality and working order of the structural developments onsite. This documentation refers to as a “Property Condition Report” (PCR). In general, PCAs are part of a planned real estate transaction. Some observations and notations are on the basis of reasonable presumptions, and professional opinion. And presumptions must not be subject to interpretation as factual information.
Property Condition Assessment Components
In general, a PCA will include a limiting inspection of the overall Subject Site, as well as the onsite structures. Overall grounds inspections include irrigation systems for landscaping, surface, and subsurface drainage systems, pavement and curbs, retaining walls, fences, lighting systems, floor painting, signs, loading docks and more. Structural inspections are limited to the available and visible components of a building. Generally, this includes key portions of the building frame, structural columns, foundation, and floorboards.
Additionally, a building’s mechanical system is inspected with detail. For example, a thorough examination of a property’s heating, ventilation, and air conditioning system, as well as the electrical network onsite. Similarly, aspects of the building’s fire prevention and pluming system are part of the assessment.
On the other hand, a property condition assessment also provides a preliminary examination of the building interior spaces. This portion of the assessment typically includes the quality and condition of finishing materials, flooring, doorways, and walls within common areas and tenant spaces. And similarly, aspects of the building envelope are also included. This includes a thorough inspection of the roofing system, rain guarding and draining network, windows, natural lighting and ventilation, stairways, storage and more.
Commercial and industrial structures, as well as multifamily residential buildings, must comply with strict safety standards. Property condition assessments additionally study a facility’s compliance in the areas of occupant health and safety. For instance, fire protection systems and devices must be up to date, and in compliance with current fire safety codes. Similarly, the assessment considers building components that may, or may not be, compliant with the Americans with Disabilities Act.
Typical PCA Limitations
It should be known by consumers that these reports strictly limit to the date of the evaluation. Consequently, consultants can make no representations after the date of inspections. In most cases, PCA reports do not comprise of building material removal or testing. However, at times, PCAs can include a level of detail, that requires structural engineering observations, sampling, analytical procedures and other types of testing.
Potential concerns outside of the ASTM scope for a PCA include: in-depth structural component evaluations, mold inspection, waterproofing material inspection, subsurface sewer pipe condition evaluations, footing, and foundation inspection, asbestos-containing materials (ACMs), lead-based paint (LBP), lead in drinking water and more.
The PCA Standard
The Property Condition Assessment scope of work is in general conformance with ASTM E 2018-015, Standard Guide for Property Condition Assessments: Baseline Property Condition Assessment Process. At a minimum, the scope of work includes a site visit, interviews with property management, a file review of local regulatory agency documents, and documents by the user, and more. PCAs include a basic visual observation of exterior and interior building components and site developments. Moreover, the onsite HVAC systems are also subject to inspection. Lastly but not least, elevators, plumbing systems, electrical systems, fire safety and security systems are additionally subject to inspection. Visual inspections of a Subject Site’s premises are also in general accordance with the Americans with Disabilities Act of 1990 (ADA).
Equity & Property Condition Report
The main objective of Property Condition Assessment reports is to assist the investors of commercial real estate with better financial decisions. The PCA report provides investors with a snapshot of current onsite information. This includes the condition of the real property, as well as any potential costs for necessary and foreseeable repairs. For example, an industrial warehouse may have a nonfunctional ventilation system. And per the PCA, maintenance is a requirement in order to properly ventilate the building. As a result, the Property Condition Report will categorize this concern, and report the necessity for repair. Additionally, the PCA report will provide a cost estimate for the repair.
Commercial Real Estate Due Diligence
The commercial real estate due diligence process comprises multiple services, in addition to PCA reports. And each of these services relate to different professional backgrounds. For example, transactions can require one, or a combination of the following services:
Appraisal & Commercial Property Valuation Report
An Appraisal Report is a price-value assessment of the commercial real estate, basing on current land-use and conditions. This is also called a Commercial property Valuation Report. Typically, this assessment is a requirement upon sales, title transfers, mortgages, taxes, insurance policy generation or development. Much like the other commercial property due diligence reports, the information within an appraisal report informs buyers, sellers managers and investors to make better financial decisions.
Transaction Screen Assessment
A Transaction Screen Assessment is a very basic commercial real estate due diligence report, with similar intent as a Phase 1 ESA. In most cases, a Phase 1 ESA is the requirement for commercial real estate sites. However, when properties are extremely low risk, there could be a dilution of the due diligence process, in the form of the transaction screen assessment. Unlike a Property Condition Report (PCR), the transaction screen gears towards contamination risk. Moreover, it provides an outline or brief on historical land uses which might be capable of causing contamination to a property. Depending on the results, a Phase 1 ESA may then become a requirement for completion.
Lead in Paint Survey
Lead is a toxic metal that has proven health effects on the human body. Much of the paint which exists in structures today includes lead. In fact, lead typically exists in wall paints varnishes and other types of cosmetic coating. In general, and per the industry-standard guidelines lead in most buildings is not a considerable “immediate hazard.” Although, per many building departments and agencies, lead-containing products require testing and maintenance of quality/condition, to ensure that it does not become deteriorated. And on some occasions, this topic can be covered by Property Condition Assessments, as well as Phase 1 ESAs.
Phase 1 Environmental Site Assessment
A Phase 1 Environmental Site Assessment is another component of the commercial real estate due diligence process. Similarly, Phase 1 ESAs follow an ASTM standard. However, unlike a Property Condition Report, a Phase 1 ESA report focuses on the environmental risk regarding past and present land use. Additionally, the Phase 1 ESA process incorporates and analysis of nearby environmental risks. And it provides an analysis of the impact to the subject property itself from nearby lots. Altogether, the Phase 1 ESA provides conclusions and recommendations pertaining to the potential risk of contamination on site.
Phase 2 Environmental Site Assessment
A Phase 2 Subsurface Investigation is a preliminary screening of shallow subsurface conditions. The premise of a Phase 2 ESA is to test for contamination, per the recommendations of a Phase 1 ESA. A Phase 2 ESA typically tests soil, soil gas, and groundwater. If significant detectable contamination exists, there may be a reasonable indication that the property has a larger contamination issue exists.
Asbestos is the nomenclature applicable to various naturally occurring silicate minerals. This material derives from mining operations and applies best for thermal insulation and heat transfer stability. Moreover, Asbestos has high strength for building material applications. In fact, most construction materials in commercial real estate buildings across the country already contain some asbestos. Almost all building thermal system insulation, and most old interior and exterior surface materials, are also Asbestos-containing. Asbestos-containing materials also refer to as “ACMs.” And potential asbestos containing materials refer to as “PACMs.”
Radon testing can be part of the commercial due diligence services, depending on the site location. The US EPA provides a Radon gas hazard map, to aid building code adaptations. There are three Radon Zones: Radon Zone 1, 2, and 3.
Various levels of mold testing and abatement apply to commercial real estate. Most commercial real estate due diligence reports comprise a basic and preliminary visual inspection for obvious signs of mold growth. Mold grows in areas with constant moisture, such as humid environments, and include spores for easy reproduction in the right setting. Excessive moisture or water on indoor flooring and baseboards can be a safety hazard for mold growth. Other building materials such as drywall, wallpaper, particle-wood baseboards, and wood-based framing can also be affected by mold, compromising it’s structural and aesthetic integrity.
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