In a triple-net lease, the owner and tenant each have a stake and a responsibility in maintaining the physical condition of a property. While a commercial lease defines these roles, interpreting and applying lease terms can be a messy business, particularly when it comes to property condition. Owners and operators alike can benefit from a tool that helps them understand the condition of a property and the cost of maintaining it within the framework of their lease agreement. A Property Condition Assessment (PCA) is designed to do just that.
A PCA is a commercial building inspection designed to assess the physical condition of a property. Often used at property acquisition, PCAs are also helpful at the commencement or termination of a lease. All major improvements and building systems are included in the assessment, which culminates in a report that provides an accurate picture of the condition of the asset and an opinion of the costs required to resolve any deficiencies. The assessment may be performed to establish a baseline when a new tenant takes possession of the property, when a tenant vacates, or, ideally, at both entrance and exit of a lease. When performed by a qualified inspector and used properly in the context of a commercial lease, a PCA allows the lessor and lessee to equitably manage the condition of a property and provides a foundation for a smooth lease exit.
Customize it for your lease and your property A PCA may be used by a purchaser who intends to immediately lease back to a prospective tenant, or by an existing owner who has a pending lease exit or entrance. It may also be requested by lessees who are entering or exiting leased properties. Either party may wish to compare the findings of the PCA with the terms of the lease agreement, which typically provides a standard for returning the property in like condition, excepting normal wear and tear. Your PCA can be customized to focus on as much detail as you find helpful and can, if needed, include items that might otherwise be overlooked in a baseline PCA report, including potentially expensive items such as replacement of the halogen light bulbs associated with parking lot lighting. The assessment can be performed by an experienced generalist, or specialists may be engaged for specific systems. Because HVAC, roofing, and pavement repair/replacement can be the most expensive building systems to address, you may wish to include inspections by HVAC, pavement, and roofing specialists in the scope of your PCA.
No surprises: expedite repairs/replacements of major building systems A PCA will identify capital needs and opinions of costs for failing or damaged building systems and safety issues, as well as long-term capital expenses based on the expected useful life of the building systems and components. This will allow you to plan, obtain funding for, and schedule restoration or maintenance efforts for minimum disruption of operations. Additionally, coordination with local contractors can be added to the PCA scope of work to provide pricing for the recommended repair work.. For property owners, this means less research when you’re ready to restore the property, saving time so your new tenant can be in place faster.
Smoother negotiations during the lease exit process Many users of PCAs request facility assessments both at the initiation of the lease and at the termination of the lease. Conducting a PCA when a tenant takes occupancy provides strong documentation of existing, “baseline” conditions, particularly when supported by extensive photo documentation. When archived and used in tandem with a PCA at lease exit, the two assessments allow you to compare the condition of the property at the beginning and end of the lease term, removing questions of responsibility for property damage or repairs. If you’ve included a system specialist in the scope of your PCA, the specialist’s assessment adds weight and legitimacy to the cost evaluation.
With any major financial transaction, investing in proper due diligence can save money, time and headaches in the long run. When entering into a triple-net lease, both lessors and lessees should recognize the PCA as a critical component in their due diligence process.