Loan officers understand the importance of providing clients with a smooth transaction process during commercial real estate deals. That’s why it’s often a good idea to assess the physical condition of a target property through a property condition assessment (PCA).
While a PCA is not mandatory, skipping a PCA could lead to major headaches later on. In this guide, we will further explain what this type of assessment includes and provide you with examples of when it’s time to schedule a PCA inspection to support your client.
What Does a PCA Entail?
You can’t decide whether you need a PCA unless you know what it includes. A PCA is like a home inspection but for commercial property. Most lenders require such assessments before financing a deal. This is because PCAs protect the lender and the buyer.
To be clear, these assessments are much more in-depth than home inspections because commercial assets have complex building systems. Also, the building area itself is usually much larger.
During a PCA, inspectors look over everything. They assess things like:
- Parking lots
- Plumbing systems
- HVAC systems
- Electric systems
- Mechanical systems
- Fire systems
- Building interior
- Building exterior
PCAs should follow the American Society for Testing and Materials (ASTM) standards. The latest standard is ASTM e2018. These standards outline what to address during an assessment and how these inspections should be performed.
If a firm does not follow ASTM e2018 standards, don’t work with them. Instead, find a PCA firm that does follow these guidelines.
Why Get a PCA?
A property condition assessment is part of the due diligence process for commercial real estate. It reveals important information about the subject property and helps your buyers make informed purchasing decisions.
PCAs can help with maintenance cost estimating as well. This way, buyers will understand the true cost of purchasing and using an asset.
Lastly, they protect your financial institution’s interests. Should a buyer default, you need to know that the property is worth what was paid for it. If it is not, your institution may absorb the losses.
Signs You Need a PCA Inspection
So when should you book a PCA inspection to support your deal? There are many instances where booking a property condition assessment is a good idea. To keep things simple, we have boiled these scenarios down to three broad categories.
1. The Property Has Been Improved
A PCA is a good idea if the property has been improved. Improved property could have been used for anything beforehand, and some of these uses could affect its value.
By “improvements,” we mean much more than land that has been turned into an operational business. Land can be improved in many ways, after all. For example, land that is owned by a nearby business might have been cleared. The owner may have installed plumbing or utilities as well.
During a PCA, the inspector will perform the following evaluations of the property:
- Assess the physical condition of the buildings and property.
- Perform a detailed site observation of readily accessible and visible components.
- Use professional judgment to evaluate the condition of the property (e.g. look for cracks and other deformities).
- Evaluate floors, walls, ceilings, and surfaced site areas that are not concealed.
- Look for deferred maintenance and physical deficiencies for which action is recommended.
PCAs and other inspections such as ESAs can protect your deal. They can also protect you and your buyer.
2. Existing Structures Look Worn or Old
If commercial land contains new structures, PCAs are less likely to reveal anything of concern. Still, these assessments should be performed on both new and aging buildings.
However, PCAs are especially important when structures look old or worn. When booking assessments for these types of buildings, make sure that the firm follows ASTM e2018 standards. Otherwise, they may overlook important systems during the inspection.
The state of aging structures can significantly affect the asset price. If structures are totally unusable, the property is less valuable. If all structures function in their current state, the property is usually more valuable.
3. There Are Structures on the Property
PCAs mostly investigate structures on the land. When a PCA is finished, the inspecting firm will generate a property condition assessment. The report details the state of building systems like roofs, HVACs, and plumbing.
If the land in question has buildings on-site, book a PCA. This is a hard rule that should be followed for every deal. The PCA will reveal the long-term costs of using and maintaining the property. It will also help buyers determine whether buildings are usable. If they are not, buyers will need to invest more money into the property.
Learn More from RSB Environmental
If you notice any of the items we identified in this guide, then you need to book a PCA inspection. You should also consider booking a Phase 1 environmental site assessment, which the experts at RSB Environmental can take care of to protect you and your potential borrower.
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