Most parties involved in a commercial real estate transaction will require a Property Condition Assessment (PCA) – which provides an assessment of the condition of an asset and immediate or long term improvements that may be necessary – at some point. Lenders require PCAs (also known across the industry as Property Condition Reports or PCRs) as part of their underwriting process, property buyers or developers use PCAs to understand and minimize risks in their investments, while property managers use PCA to budget ongoing maintenance costs for their capital planning.
PCAs are valuable in both equity and debt markets. Lenders use PCAs to determine if a borrower will have the required funds to maintain the asset throughout the life of the loan. Buyers can use the knowledge of issues and expected maintenance costs that the PCA gives them as a bargaining tool to drive down the purchase price of the property. For the seller, doing a PCA will help to proactively prepare against such price negotiations due to missed issues.
In addition to these “straight-up” PCAs, there are some variations “with a twist”.
Pre-lease Due Diligence for Tenants
While it is less common for a tenant to need engineering due diligence, there is good reason for tenants to commission a Property Condition Assessment during their pre-lease due diligence. Retail tenants who are moving to a different site, for example, often request PCAs as part of their site evaluations. Getting a PCA report done on a possible site will alert a tenant to potential repairs that they might be or become responsible for now or down the road.
Many lease contracts place responsibility for maintaining (certain) building systems on the tenant, and it is important for the tenant to understand the expected useful life (EUL) and remaining useful life (RUL) of systems to avoid unforeseen costs. A pre-lease PCA may also establish the condition of the asset when the tenant moves in, which establishes the “base-condition” to which it must be returned at the end of the lease-term.
PCAs identify issues with a building and provide a schedule of capital replacement reserves. But what about the opportunity to save money? A Green PCA (GPCA) – which incorporates an assessment of energy efficiency and other ‘green’ elements of interest into the PCA – can help save money by identifying opportunities to improve the way building systems operate. A GPCA essentially combines a standard Property Condition Assessment and an Energy Audit to provide in-depth information about the building condition and operational efficiency.
A green PCA may include energy benchmarking services, energy audits or a simple Green PCA checklist. Performing such assessments in conjunction with the PCA will identify aspects of a buildings energy management program that are suboptimal and can easily be corrected. A Green PCA will also give the user a list of potential energy efficiency investments (commonly known as Energy Efficiency Measures – EEMs) and will rank these investments in terms of payback period—often several opportunities with sub-3-year payback periods are indentified. The property owner/operator can then choose which EEMs to implement based on need, budgets, capital investment return criteria, green branding goals, and sustainability goals.
A better, more-efficient performing building can save money through lowered energy bills and reduces operational costs. For example, optimizing and automating the HVAC and lighting systems can offer significant energy reduction without requiring a major capital investment. Better building systems will also lower ongoing maintenance costs.
The Energy Audit and Property Condition Assessment go well together as they are addressing the same systems. The PCA may schedule the replacement of a roof mounted HVAC system in year 8 of the replacement reserve as that is the end of its useful life; however, the Energy Audit may make a case for not using an old inefficient system until it fails; rather, the building owner may receive an positive return by replacing it sooner. Disclosure of buildings’ energy efficiency or consumption is required by an increasing number of cities around the country. The required information can be collected during the GPCA to ensure compliance with energy disclosure codes.
So, next time you order a PCA think about whether you’d like that with a twist!