Importance of Property Condition Assessment in Building Sales and Leases

Buildings depend on various engineering systems to operate properly, and their condition is not always evident when a building is leased or bought. There are cases where maintenance issues are easy to detect due to their negative aesthetic impact, for example when a wall has cracks or its paint has peeled off over time. On the other hand, major issues related with key building systems tend to be hidden, and can only be detected if the property is assessed by qualified engineering professionals.

A property condition assessment can be a great opportunity to carry out an energy audit as well: since the building will the analyzed in depth, it is a good chance to detect opportunities for reducing or managing energy consumption.

It is generally cheaper to fix an issue before it causes a key building system to fail, which means a PCA can be considered an investment – the savings achieved by solving problems in advance more than make up for its cost.

Benefits of a PCA for the Building Buyer or Lessee

Before you lease or buy a building, it is very important that you get a detailed snapshot of its current condition. If this step is overlooked, you risk facing sizable expenses down the road:

• If you purchase a building where maintenance has been poor or where key equipment is reaching the end of its service life, you may have to assume major expenses in the short term.
• The same applies for leasing: Tenants are often responsible for building maintenance, and they may be held liable for previously existing conditions if they fail to assess them.

With a pre-lease engineering report, you can only be held liable for issues that occurred once the building was under your responsibility. On the other hand, if a previously undetected issue shows up once you have leased a space, you have no way to prove it already existed – the associated expenses can be significant for large equipment such as generators and compressors.

Purchasing a Building with a Loan

Companies normally take loans to purchase real estate, even if they have the capital availability. The reason is simple: it is generally more lucrative to reinvest capital in business operations rather than spending a large sum in a building.

When a building is bought through a loan, banks want to make sure the asset is in good condition because it serves as the collateral for the loan. However, if the building has major issues, little value can be claimed from it. For this reason, a property condition assessment (PCA) is often mandatory before the loan can be approved.

Benefits of a PCA for the Building Seller or Lessor

A property condition assessment offers benefits for both parties involved in a transaction, regardless of whether the building is being sold or leased. They are often paid by the tenant or new owner for self-protection, but they can benefit the original owner as well.

• When buildings are being sold, the PCA can help assess the value of a building – a higher price can be charged if there is proof that the building’s structure and key systems are in optimal conditions. The PCA also protects the seller from claims in case there are issues attributable to the buyer.
• In the case of leases, a PCA provides a basis against which the building’s condition can be assessed. It helps define a scope of the reparations that must be carried out by the lessee, especially at the end of the contract.

Basically, a PCA reduces the risk for real estate investors. Unwanted surprises are less likely if the building has been properly assessed by a qualified team of engineers.

ASTM E2018-15: The Standard for Property Condition Assessments

The American Society for Testing and Materials (ASTM) published the first version of the ASTM E2018 standard in 1999, and two revisions were carried out in 2008 and 2015. The standard deals with PCAs in depth, but the process can be summarized in four key steps: Documentation review, site survey, cost analysis and property condition report.

The main reason for upgrading the ASTM E2018-15 standard was to simplify the framework, while increasing its effectiveness as a guide to assess the risk associated with building conditions.

Documentation Review

A PCA can be carried out more effectively if relevant documentation is reviewed first, because consultants can then proceed with the site survey with a better idea of what to expect and which areas to focus on. The following are examples of important documents that must be reviewed during this stage:

• Construction plans
• Technical specifications
• Equipment data sheets
• Maintenance reports
• Consulting reports

In short, any document that contributes to having a precise snapshot of the building’s condition is useful at this point. As a complement to documentation review, key staff members should be interviewed, especially those from the maintenance and engineering departments.

Site Survey

Once documentation has been reviewed and key personnel has been interviewed, the consulting firm can proceed with a site survey. The goal is to provide a detailed assessment of key building systems, such as:

• Foundation and structural integrity
• Roofing
• Building envelope
• Exterior & interior finishes
• HVAC, elevators and other mechanical systems
• Plumbing
• Electrical installations
• IT and telephone installations
• Fire sprinkler systems

With the information collected from documentation, interviews and direct inspection, it is possible to estimate future maintenance costs while detecting issues that require immediate attention.

Cost Analysis

Technical analysis is important, but there are two additional questions for which all clients will want an answer:

• What is the cost associated with each issue detected?
• When will the costs be incurred? Are any issues urgent?

In other words, the client will want to know what must be done, when it must be done, and how much it will cost. Of course, a professional consulting firm will also suggest the most cost-effective way to remediate each issue detected.

Property Condition Report

The property condition report (PCR) is the end result of a PCA, and it provides key pieces of information that are of interest to both parties involved in the lease or sale: A detailed outline of the condition of all building systems, the cost associated with each of the issues detected, and a classification of urgent and non-urgent issues. Urgent or immediate costs are those associated with issues than can’t wait due to their potential consequences:

• Unsafe conditions, both existing and latent.
• Construction code violations.
• Fire code violations.
• Any issue that may cause a critical building system to fail within one year if unattended.
• Any issue that will experience drastic cost escalation if unattended.

In the 2015 edition of the standard, three new terms were added to describe the condition of each item:

• Good condition:The system is working properly and will not require repairs in the short term.
• Fair conditions: The system works, but will likely need repairs soon.
• Poor condition:The system is not operating and must be repaired as soon as possible.

Concluding Remarks

Whenever a building will be sold or leased, carrying a Property Condition Assessment (PCA) is in the best interest of both parties. For the building owner, the PCA provides a reference point for future assessments; and at the same time, it protects the buyer or lessee from having to assume costs that are due to conditions present beforehand. In short, a PCA reduces the risks associated with building sales or leases, and is normally required by financial institutions whenever a loan is involved.

If you will be carrying out a PCA for a property, make sure you work with a consulting firm that adheres to the ASTM 2018E-15 standard. That way you can rest assured that the PCA is carried out with a tried and true methodology.