Buying a commercial property is a huge investment. But how exactly do you know if your investment will yield a strong return? While there are no guarantees in the business world, there are a few ways you can mitigate risk during commercial transactions. A prime example involves using property condition consulting.
Below, we examine what this service is. More importantly, we discuss the benefits of working with a consultant and how these services can help you protect your investments.
What Is Property Condition Consulting?
Property condition consulting is a service offered by commercial property assessment companies like RSB Environmental. The primary condition-related service that we offer is a property condition assessment or PCA. An assessment is a top-down analysis of all site improvements.
Essentially, a PCA analyzes the human-made components of the parcel your company is looking to acquire. A few examples of features that are inspected include:
- Parking lots
- Building systems (e.g., HVAC, electrical, etc.)
A PCA is a very thorough assessment. However, it is not designed to detect “hidden” issues. For instance, inspectors will not rip out walls to look for mold or water damage. With that being said, a professional assessment team should spot obvious outward signs of water damage or other building issues.
Property condition consulting is a valuable service for several reasons. The inspection team can provide an objective assessment of a property. This assessment allows both buyers and sellers to make informed decisions based on accurate site condition information.
A PCA will also help you determine the property value and make a fair bid on the parcel.
When Should Property Owners Book a Condition Assessment?
There are several instances when prospective property owners should schedule a condition assessment. PCAs are most commonly used in preparation for commercial real estate transactions.
A PCA can help sellers demonstrate a property’s value and condition. The PCA will also allow buyers to better understand the state of the site they are purchasing. However, PCAs are not only useful when a parcel is going to change hands.
Another use case for PCAs is during refinancing. A PCA will help owners and lenders assign an accurate property valuation. This assignation is particularly important if an owner wants a line of credit or cash-out refi on the property.
Property condition assessments can also be used for general business continuity planning. A site owner can book a PCA to account for future upkeep costs. You can use this data to ensure that you are setting aside appropriate funds for roof repairs, maintenance, or other ongoing considerations.
What to Expect During a PCA
A PCA is a very thorough assessment of the property. As such, it will take an entire day to complete. If your site is quite large, it may take several days to complete. For example, a PCA consultant will need a few days to inspect a 1,000-unit apartment complex. However, a 100-unit complex could be inspected in a single day or less.
Then, you will receive a PCA report. The turnaround times will vary depending on the size of the property. When you work with RSB Environmental, we will be upfront with you about the expected turnaround time. We will also take into consideration whether your deal is time-sensitive in nature to expedite service.
What Risks Can Be Mitigated with a Condition Assessment?
Property condition assessments are a great risk mitigation tool. For example, imagine that you just bought a new apartment complex and did not book a PCA. You anticipated a short time to value and a strong return on investment. But the complex needs a new roof, which will cost $300,000.
Such oversight could quickly erase any potential return on investment for years. While you may have bought the property anyway, you would have made a lower bid due to the imminent roof repair.
In short, PCAs help you accurately calculate time to value and return on investment. You can base buying decisions on projected maintenance costs, and you can also avoid sites that will have high operational costs in the first few years of ownership.
How Owners Can Leverage Property Condition Assessments
Property owners can use PCAs in several different ways. For site refinancing, a PCA will help owners obtain lower interest rates. PCAs can also assist with the loan approval process. In addition, PCAs can be used when applying for site equity lines of credit or cash-out refinancing.
The most common use for PCAs is negotiating site purchase prices. A PCA does not assign a set appraised value like a residential home inspection, but PCAs can be used to accurately project site operation costs. A seller can use this information to determine a fair offer for a property.
Lastly, PCAs are a useful tool for predicting long-term upkeep costs. Site owners can estimate what maintenance and repair expenses they are likely to encounter over the next five years. This information is invaluable when projecting the time to value and return on investment of a property.
Learn More About Commercial Real Estate Due Diligence
Property condition consulting is one of the many services that fall under the umbrella of transaction “due diligence.” A few other examples include Phase 1 environmental site assessments (ESAs), Phase 2 ESAs, and Phase 3 ESAs.
Due diligence protects buyers, sellers, and financial institutions. To learn more about due diligence topics, sign up for RSB Environmental’s e-newsletter. We will send you information on the latest news, environmental updates, and more. To be added to our list, send us an email at firstname.lastname@example.org. We look forward to hearing from you.