PROPERTY CONDITION ASSESSMENT STANDARDS
STANDARD FOR PROPERTY CONDITION ASSESSMENTS
In August of 1999, the American Society for Testing and Materials (ASTM) published a Standard E2018-99, which defined good commercial and customary practice for conducting a baseline Property Condition Assessment (PCA). This standard was specifically written for commercial real estate and largely intended for commercial real estate transactions. The Standard was last updated in November of 2015 and is now known as E2018-15.
This standard is the recognized protocol for due diligence building inspections. This protocol makes it easier for those involved with commercial real estate transactions, as the report contents and format have been well defined.
THE PCA IS DIVIDED INTO FOUR STEPS:
1. Perform document review (drawings, maintenance records, etc.).
2. Perform a visual, walkthrough survey of the property.
3. Prepare cost estimates for recommended major repairs or replacements.
4. Document findings and costs for recommended repairs in a written report.
As part of the PCA, the consultant should contact the local building department and local fire department to check for building or fire code violations, and to ensure that a certificate of occupancy was issued for the building.
RECOMMENDED REPORT CONTENTS INCLUDE:
- Opinions of probable costs only for repairs likely to exceed $3,000. These costs should be for repairs or replacements likely necessary over the next five years.
- Estimates of remaining useful life for building components.
- Photographs of typical building elevations, major systems and major deficiencies noted.
The entire Standard is 21 pages long and available from ASTM at their website, www.astm.org
FINANCING ASSESSMENT
When preparing a new mortgage, or renewing an existing mortgage, lenders will often require their clients to obtain certain reports as part of the financing.
Commonly this involves providing to the lender a report on the physical condition of the property, a Phase I Environmental Site Assessment, and potentially other reports.
There will be different requirements for these reports, depending upon the lender. Most lenders are aware of the ASTM Standard E2018 for Property Condition Assessments and thus require the reports meet this standard as a minimum. However, there may be variances to the ASTM standard that lenders require, which could include, for example, a longer timeframe for considering capital replacements. The ASTM standard requires cost estimates be provided for repairs likely to exceed $3,000 within the next few years.
- Some lenders will require the timeframe for planning capital replacements be extended to ten years or sometimes the term of the mortgage or the term of the mortgage plus two years. Additionally, lenders may require a somewhat higher cost threshold for cost estimating in the report. The ASTM threshold of $3,000 may be too low, and a threshold of $5,000 or $10,000 will sometimes be requested.
Through Primus Home inspections relationships with Environmental consultants, we are capable of providing Phase I, II and III Environmental Site Assessments in conjunction with our Property Condition Assessment, so that both requirements can be met for the lender through one point of contact.
Often when the Property Condition Assessment (PCA) or Environmental Site Assessment (ESA) is required by the lender, the lender will also require a reliance letter be provided in their favour. The reliance letter allows that the lender can rely on the report as if it was addressed to them. This provides added protection for the lenders, knowing that the engineering company will stand behind their reports. Primus Home inspections always provides PCA reliance letters for lenders of our clients, free of charge.
At Primus Home inspections we also know the importance of our clients selecting an engineering firm that is known to their lender and on their list of approved service providers. To that extent, we actively seek to ensure we are on all approved lists for the major lenders.
PRE-LEASE – POST-LEASE ASSESSMENTS
Property Condition Assessments are often carried out when entering into a lease and at the conclusion of a lease. The PCA can be undertaken on behalf of the lessee or the lessor, and is sometimes undertaken for both, prior to entering into a lease agreement.
PRE-LEASE:
For a tenant, a PCA prior to leasing is just as important as prior to purchasing. When leasing, the tenant will likely be responsible for maintaining some or all of the building systems. For leasing a single tenant building under a triple net lease condition, the tenant is likely responsible for the repair and maintenance of all systems, typically as “a prudent owner would.” If the building has not been well maintained or there are several systems at the end of their life expectancies, there is greater risk of unforeseen expenses for the tenant.
The benefits to the tenant include:
- Understanding the condition and level of maintenance of the building structure and major systems
- Knowing of major repairs or replacements that may be necessary over the term of the lease and their associated costs
- Validation of representations made by the owner about the property (e.g. the building has a new roof)
- Greater likelihood of meeting lender’s requirements for a loan may require a PCA
- Greater confidence and peace of mind in decision to lease
For a building owner, a PCA prior to a new tenant moving in establishes the existing condition of the property. Thus, there is a fair baseline to which the tenant should leave the premises at the conclusion of the lease. This helps to protect the owner as the true condition of the building at the start of the lease has been documented.
POST-LEASE:
At the conclusion of a lease, there is often an obligation for the tenant to undertake certain repairs, where there has been deferred maintenance. There may also be an obligation for the tenant to bring the building back to a base condition or condition the building was in when they moved in. If there was a prelease lease inspection report done, this is somewhat easier to establish.
However, if there is no prelease report, or there is disagreement as to what repairs are required, a post lease PCA will help to resolve the situation and bring a close to the lease. In this case, an unbiased report can serve both the owner and the tenant.
Pre-lease and post-lease PCAs often exceed the ASTM Standard in that clients will often want to know of costs for repairs that are routine maintenance items and costs for repairs that are less than the $3,000 threshold provided in the Standard.
ENVIRONMENTAL SITE ASSESSMENTS
Environmental site assessments (ESA) are an integral part of the services we provide. From Phase I site assessments to Phase II sampling to Phase III clean-up and remediation, we are capable of providing our clients with the service they need for a successful acquisition. Primus Home inspections will coordinate the ESA so that there is only one point of contact for the project. The benefits include less disruption to the tenants, as the site reviews are coordinated, and less work for our client to organize the various consultants.