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.
What To Expect During a PCA Inspection
An experienced inspector will assess the general state of a property, including its systems, structure, and components, during a PCA (Property Condition Assessment) examination. The inspector will perform a complete visual inspection of the building, checking for risks, damage, and signs of wear and tear. They could also go at documents of upkeep and construction done on the property.
The inspection report will typically include detailed findings and recommendations for any necessary repairs or upgrades. The inspector may also provide an estimated cost for these repairs, helping property owners and managers to plan for future expenses. It’s important to note that a PCA inspection is not a guarantee of the condition of a property, but rather an evaluation of its current state based on a visual examination and review of available documentation.
The Benefits of Preventative Maintenance and Regular PCA Inspections
Preventative maintenance and regular PCA (Property Condition Assessment) inspections are essential for the long-term health of a property. By conducting regular inspections, property owners and managers can identify issues before they become major problems. This can save time and money in the long run by catching small issues before they become larger and more costly to repair.
Regular inspections also help to ensure that the property remains compliant with local regulations and building codes. By staying on top of maintenance and repairs, property owners can avoid fines and penalties that can result from non-compliance. Additionally, a well-maintained property is more attractive to tenants and can help to increase occupancy rates, leading to higher rental income. Overall, preventative maintenance and regular PCA inspections are a wise investment in the longevity and profitability of any 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.
To learn more about PCAs and related assessments, sign up for our email newsletter. We cover topics such as PCA inspections, ESAs, and much more to keep you informed about the latest environmental compliance topics that affect real estate transactions.
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Frequently Asked Questions
A PCA inspection, or property condition assessment inspection, is a thorough assessment of the physical state of a property. In addition to testing and sampling different building components including electrical systems, HVAC systems, roofing, and structural components, it often involves a visual evaluation of the property.
The length of a PCA inspection can vary depending on the size and complexity of the property. A typical inspection may take several hours or even a full day to complete.
The frequency of PCA inspections can vary depending on the type and use of the property. Commercial properties may require more frequent inspections due to the higher volume of traffic and use, while residential properties may require less frequent inspections. It is recommended to perform a PCA inspection at least once every 5-10 years for commercial properties and every 10-15 years for residential properties.
When choosing a PCA inspector, it is important to look for someone with the appropriate qualifications and experience in conducting property condition assessments. You may also want to consider their reputation, scope of services, communication and reporting, and cost. It is also recommended to ask for referrals from trusted sources such as real estate agents or property managers.
A thorough explanation of the inspector’s findings, including any possible problems or dangers found during the inspection, should be included in a PCA inspection report. Also, it must to include any improvements or repairs that are advised, along with an estimate of their cost. For property owners, purchasers, and lenders, the report should be simple to interpret and provide precise, useful information.