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Understanding a Property Condition Assessment

April 18, 2019

A Property Condition Assessment (PCA) is an architectural due diligence report that provides detailed information about the physical condition of a property or building. While similar in some respects to a home inspection, a PCA is conducted primarily on commercial real estate transactions. A PCA requires a qualified professional to assess a building in its entirety from its roof and façade to its main mechanical systems such as HVAC, plumbing, electrical, and fire protection which are then summarized in terms of their overall condition as well as identifying any significant deficiencies discovered. The PCA then uses this information to comment on when a system or component is most likely to require repair or replacement and provides recommended actions with budgetary costs. These costs are categorized into immediate, short-term, or reserve-term needs. Immediate needs are life-safety or code violations that must be rectified prior to close, short-term needs are priority repairs that should be rectified within a year of close, and reserve-term needs are future repairs that occur during the reserve-term which typically reflects the term of a loan and can span from 5-20 years depending on the project and the funding.

Why is completing a PCA important? 

PCAs give purchasers and lenders an accurate and professional opinion of the current physical state of a property and how that plays into the property’s short-term and long-term financial value. As part of the due diligence process, a PCA should be conducted concurrently with other environmental due diligence services such as a Phase I Environmental Site Assessment (ESA) or Industrial Hygiene (asbestos and lead surveys).

What is the PCA scope of work? 

Qualified professionals conduct PCAs in accordance with the current ASTM Standard E2018. ASTM is an internationally recognized standards organization that develops and publishes technical standards for environmental professionals on a variety of materials, products, systems, and services. ASTM E2018-15 lays out the baseline for scope and components of a PCA, terminology and definitions, and qualifications of the consultant.  

What is the PCA process?

The process a qualified professional uses to compile the information needed to write the report includes three main components: review of documents associated with the property, an onsite walkthrough, and interviews with key individuals knowledgeable about the property as well as local municipalities.

The first step is to collect and review documents associated with the property. The PCA consultant will do as much research as possible to better understand the property, its components, and its history. The consultant reviews documents such as: construction documents, assessing records, capital expenditures, maintenance logs, warranties, certificate of occupancy, and site surveys. Freedom of Information (FOIA) requests are submitted to local building and fire departments to inquire regarding any outstanding code violations. Natural hazard designations such as flood maps, wind zones, and seismic zones are reviewed to evaluate structural risk assessment. 

The next and most important step in the PCA process is the walkthrough during which the field observer visits the property and examines the building and its various components to determine overall condition and identify areas of deferred maintenance and items requiring repair or replacement. The walkthrough is visual and nonintrusive; which is to say it does not involve the removal or relocation of materials nor include functional testing of equipment. For each system or component, the field observer attempts to answer three questions: What is the size (quantity, rating), age, and condition?  These three criteria determine when a system or component will likely require replacement and its associated cost.

Ideally, the interview component occurs simultaneously during the walkthrough.  Whenever possible, a field observer meets with someone knowledgeable about the property while onsite. This allows them to ask specific questions about the building systems and components they are evaluating. Consultants seek to interview individuals with thorough knowledge of the property such as an owner, property manager, maintenance technician, or tenant.

The PCA is based on the collection of information gathered in the previous three steps and is assembled into a technical report that details any defects that are time sensitive or hazardous and need to be taken care of immediately, other defects that are not as time sensitive but could indicate potential problems in the future, and cost tables with budgetary estimates for addressing the recommended repair items.

What does a PCA evaluate? 

  • Structural frame and foundation
  • Roof including membrane, flashings, and drainage
  • Exterior walls including façade, windows, doors, and signage
  • Interior finishes (concentrating on non-cosmetic considerations)
  • Heating, Ventilation, and Air Conditioning (HVAC) systems and components
  • Plumbing systems and fixtures
  • Electrical systems and components
  • Elevators and conveyance systems
  • Fire protection systems and components
  • Landscape components including parking, paving, irrigation, and retaining walls
  • Accessibility including Americans With Disabilities Act (ADA) and Fair Housing Act (FHA)

Who needs a PCA? 

The need for a PCA is identified in the due diligence part of a commercial real estate transaction. PCAs are often required by lenders for both new purchases and refinancing. For lenders, PCAs offer insight about the way a borrower treats their assets and their ability to make payments. A poorly maintained building can indicate a lack of funds for repairs, which may translate into difficulty repaying a loan. A property that serves as collateral can lose value without regular maintenance.

For purchasers, PCAs are a valuable tool to help them understand the risks, issues, and potential costs associated with owning a property. Hiring an independent third-party to evaluate a building’s systems and components allows for greater leverage during the buying process and helps a future owner budget for capital expenditures down the road. 

PCAs can be useful in negotiations for sellers as well. Those who take good care of their property can complete a PCA to show how little may need to be invested over the reserve term of a loan.

What property types need a PCA? 

  • Commercial retail 
  • Professional offices 
  • Industrial warehouses
  • Hospitals, medical
  • Hotels
  • Schools 
  • Multi-family residential 
  • Mobile home communities 

Who should complete a PCA? 

A PCA report is only as good as the skill of the professional conducting it. To ensure the highest quality report, it is best to hire only experienced providers with registered architects or professional engineers on staff to review the project, inspect the asset, or both. 

PM Environmental, Inc. has extensive experience with buildings of diverse types, from multi-family to large-scale office and industrial properties. PM’s qualified staff is comprised of individuals with professional certifications from the American Institute of Architects, LEED, the International Facility Management Association, and the International Association of Certified Home Inspectors. Contact PM today to speak with one of our professionals about your next commercial real estate transaction.