There is a myriad of cases where there arises the need to closely examine existing property to make decisions. Whether it's due diligence on a potential acquisition or preparing for a conversion or capital improvement, knowing the current state of the property is important information.
Property Condition Assessments (PCA) are real estate investigations that seek to give clients the details of a building or property they may be purchasing, leasing, financing, maintaining or evaluating. PCAs are also known as Commercial Building Inspections, Commercial Property Inspections, or Residential Property Inspections for Multifamily.
The industry standard used for PCAs is ASTM E2018. Being the standard guide of property condition assessments, ASTM has outlined the process and the four major components of a PCA.
A PCA that follows ASTM’s guide will give the foundation of information a client needs regarding the property.
The process of a PCA begins with a Document Review & Interviews, with the goal to be giving the consultant an understanding of the property before they perform the walk through. During this process, the inspector may give the current building owner a Pre-Survey Questionnaire on the subject property.
With the responses of the questionnaire and the documentation provided, the consultant can also seek out information provided by the municipal agencies, such as Certificates of Occupancy, Accessibility surveys, Fire code compliance, tests and violations, various publicly available documents and, if feasible, obtaining a set of architectural drawings.
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In the Walk-Through Survey, the inspector visually inspects the property to observe the physical condition of the systems and identify any physical deficiencies or inadequacies. There are ten major areas that are looked at during the walk through.
While the areas above may look comprehensive, in the guideline some areas have specific items listed as Out of Scope from the baseline PCA, such as entering crawl spaces, removing electrical covers, or examining tenant-owned or maintained equipment. By astutely reviewing what is and isn't covered in the baseline PCA walk-through survey, there may be some building systems the client feels needs enhanced due diligence. The ASTM E2018 guide recognizes this and lists additional inspections and surveys that can be added to this process, some of which cover the items listed as out of scope. Common ones include:
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With the information gathered in the previous two steps, the inspector will compile a list of physical deficiencies and calculate the probable costs to remedy them. The costs of the remedies fall in two categories: Immediate and Short-Term (within 1 year).
Typically in an ASTM standard PCA, the prepared opinion is a rough estimate based on the inspector's experience and knowledge. The ASTM guide's specifies that cost figures are only based on a certain threshold of conditions and it’s only meant to give a general understanding of the condition of subject property.
Some property condition assessment companies have the capabilities and expertise to perform more detailed cost breakdowns, much like true cost estimation. This would include researched price of materials, labor, overhead and profit, etc.
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The end work product of a PCA will be the Property Condition Report (PCR) given to the client. A PCR will go in depth of all the inspector’s findings in the document review and walk through. Also included in the PCR will be the scope of work, including any areas of enhanced due diligence the client has agreed to. If there were any deviations to the standard guide, it will be included in the report as well.
For each physical deficiency found, the PCR will have photo documentation, the description of the condition and an opinion of probable costs to remedy. In some reports, a full photo log of the walk-through survey is included in the appendix.
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The quality of a PCA ultimately depends on the people performing the due diligence. The building inspector’s experience and skills are critical to getting the best and most comprehensive answers to the client. Factors such as knowledge of the building type, professional training, certifications, and licenses and education should be looked at to deem if prospective consultants are qualified. When evaluating someone’s PCA qualifications, look at whether they have held a professional license (General Contractor, Architect, Engineer) as well as have experience performing inspections during course of construction or in a forensic setting.
Depending on the location of the property there may be unique regional challenges to account for. For example, a consultant who performs property condition assessments in San Diego can easily do PCAs in Los Angeles or Orange County, but if they were to go to Columbus, Ohio, they would be unfamiliar with the building code unless they had experience building there.
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The due diligence process of a PCA is not unique in the real estate industry. An unbiased expert opinion on a building's current state is valuable for owners and businesses aiming to find solutions for their facility challenges, thus many other kinds of real estate investigation reports have the same or similar processes. The following are some common assessments and reports that share the same DNA:
Facility Condition Assessment (FCA) is a process to closely analyze the condition one facility or a collection of an organization’s portfolio of facilities. In layman terms it is a PCA taken to the extreme: instead of one inspector there is often a team of specialists employed to perform an in-depth analysis of each building system, and, the subsequent report and estimates are detailed enough to help a capital programs manager determine the level of investment each facility needs. Other names it can go by are Equity level PCAs or Portfolio Condition Assessments.
Forensic Property Condition Assessment is a variation of the PCA used for the purpose of construction forensics. Depending on the nature of the claim, the entire property or a subset of it is closely looked at. Often the forensic inspector uses building diagnostics to determine if there are construction defects and the process is thoroughly recorded to be used as evidence.
Maintenance Condition Report utilizes the first three steps of a PCA (Document review, Walk-through, Opinion on Costs to Remedy) and organizes the information for facility management’s needs. The end report is the basis for the facility’s Maintenance Manual tailored to the systems the owner or tenant is responsible for.
Building Conditions Reports (BCR) and Physical Elements Reports are special purpose PCRs required for condominium conversion projects in some municipailities such as San Diego. Depending on the local ordinance, they may specifically require a licensed engineer or architect to perform the survey as well as include additional inspections outside ASTM's standard guide. Read more about BCRs here.
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In real estate the term due diligence often gets thrown around in which agents and brokers advise owners on 'doing your homework' when performing any property transaction. Not many people realize that there is a legal definition of Due Diligence: the level of care, prudence and activity a person or company would do to acquire objective and reliable information prior to a specific event of decision.
The inspection of a property and the resulting report is a major part of real estate due diligence, however there are other risk factors an astute client should research in their process of gathering critical facts. For example, the PCA inspector may find the building in excellent condition, but the environmental survey could find lead paint or asbestos.
It ultimately comes down to when a client needs to know detailed facts about the property. The need comes usually right before a major decision involving the property. Here are some common scenarios where a client gets the most benefits conducting a PCA:
Just as commercial buildings vary in size and features, the turn-around of PCAs vary in the same way. A professional or company that provides property condition assessment would listen to the client's needs and give an estimate of how long it would take to meet them. The following items contribute to how long it takes to perform a PCA:
As with many services, there are trade-offs between speed, cost and quality.
The cost of inspections & reports vary widely depending on the complexity of the job and the needs of the client. Common items that impact the inspection / assessment's cost are:
When a property condition assessment company is provided information of the building(s), they can provide a detailed proposal.
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