Property Condition Assessment (PCA)
Excerpts extracted from Wikipedia, the free encyclopedia
Property Condition Assessments (PCAs) are classified as engineering inspection reports (Property Condition Report) based on an inspection made by one or more engineers having knowledge of the building component(s) inspected. There PCRs are usually associated with commercial real estate. Effectively they are more detailed versions of home inspections and have similar (and additional-see below) value propositions. Oftentimes they are done as part of a property transfer and give all parties to a transfer or management organization an actual “picture” of the present condition of the property.
They are done in both equity and debt markets. On the equity side these reports primarily have value to the purchaser in that they can understand the issues and the potential costs associated with owning a property. The Property Condition Report (PCR) would be used in these cases to negotiate the purchase price much like a home inspection. These reports tend to be very detailed, may require a number of specialists to evaluate the various building systems (e.g. HVAC, Elevators) and can cost $20,000 to $100,000 or even more depending upon the size of the property (i.e. number of buildings, number of units, number of floors, etc.) which is directly related to the square footage of the property inspected.
In debt markets, the reports have the value of letting the lender know that the borrower will likely have sufficient cash flow to operate, maintain and update the property over the course of the loan. This provides some assurance to the lender that loan will be repaid or in the worse case, the property will not decline in value in the situation they have to sell it to recoup their loan amount.
PCAs are not to be confused with facility condition assessments which are similar in nature but serve a different purpose.
History
The PCA process began to formalize in the early 1990s as a response to the Resolution Trust Corporation (RTC). The process of performing PCAs began to become routine and formalized with the increased demand however there were still many inconsistencies. A 1995 Standard & Poor’s Guide further defined the process and then in 1999 ASTM released a standard called 2018-99. Since the year 2000 tremendous growth in the securitized lending market, or CMBS, caused a spike in the completion of these reports as they were required to complete a deal. Further, this has led to advancements and convergence on the scope, methodology and cost.
It is important to discern however the difference between a PCA done for the debt/CMBS markets and that of one done for equity markets as the cost, methodology, detail and value proposition vary tremendously.
Scope
A PCA covers ten major areas including
- Building Site (topography, drainage, retaining walls, paving, curbing, lighting)
- Building Envelope (Windows and Walls)
- Structural (Foundation and Framing)
- Interior Elements (Stairways, hallways, common areas)
- Roofing Systems
- Mechanical (Heating, Ventilation, and Air Conditioning)
- Plumbing
- Electrical
- Vertical Trans (Elevators and escalators)
- Life Safety, ADA, Code Comp. Air Quality, Fire Codes, Handicapped Accessibility, Water/Mold
The PCA process generally consists of two phases: a site inspection and data analysis. The site inspection should be a thorough and representative picture of the structure and abovementioned building systems. For larger buildings, a general rule of thumb is to view 10% of the building; however, depending on the structure, floor plan and building systems, this may not be enough to afford a representative picture. The report should include a narrative summary of the building type and condition, and cost tables of the immediate and long-term expenses of the building maintenance.
Value proposition and users
The users of a PCA may include a seller, a potential buyer, a lender, an investor, an owner or in some cases a property management firm.
The reports may be of use for:
- Negotiating the purchase price of a property (buyer)
- Capital or strategic planning (an owner)
- Loan approval (a lender)
- Determining the level of maintenance of a property having a direct relationship to reserve funding
