Prior to most commercial property transactions, there is a due diligence process that involves title work, survey work and an environmental assessment. The latter of these processes is commonly known as a Phase I Environmental Site Assessment (ESA), which is typically performed in accordance with the American Society for Testing and Materials (ASTM) standard designation E-1527, Standard Practice For Environmental Site Assessments: Phase I Environmental Site Assessment Process. The ASTM Phase I standard was developed in 1993 by the ASTM Committee E50 on Environmental Assessment and is a common component of commercial property transactions.

An ESA is a non-intrusive study that evaluates the environmental condition of a commercial or industrial property. No soil sampling, groundwater sampling, geophysical survey or other subsurface investigations are conducted. If necessary, a Phase II ESA (the intrusive study) may be recommended to investigate environmental conditions. The ESA industry represents a nearly $475 million market that is fueled by the buying and selling of commercial property.

The environmental due diligence process is a tool used to determine if there are environmental conditions on a property that diminish property value or present a liability concern to the prospective buyer. However, the environmental due diligence process falls short of identifying potentially greater liabilities that are associated with the physical condition of the property. Many lenders, property managers, real estate investors and prospective purchasers can avoid this commonly overlooked liability by performing a Property Condition Assessment (PCA).

In August 1999, the same ASTM committee that developed the ESA standard also developed a standard for conducting a PCA. Since there is no such thing as a perfect commercial piece of property, a PCA is a helpful tool to identify the current physical condition of a commercial property and to offer opinions of areas that need correction.

ASTM Property Condition Assessment Standard

The PCA standard is a specific kind of due diligence, pre-purchase, pre-lease or post-lease inspection (Standard Designation E2018-01 Standard Guide for Property Condition Assessments: Baseline Property Condition Assessment Process). The ASTM developed the standard to define “good commercial and customary practice for conducting a PCA.” This standard was specifically written for commercial real estate transactions. The objectives in the development of the Standard Guide for Property Assessments include:

• facilitating consistent and pertinent content in PCA reports;

• developing practical and reasonable recommendations and expectations for site observations, document reviews and research;

• establishing reasonable expectations for PCA reports;

• assisting in developing an industry baseline standard of care for appropriate observations and research; and

• recommending protocols for consultants for communicating observations, opinions and recommendations in a manner meaningful to the user.

In defining “good commercial and customary practice for conducting a PCA,” the goal is to identify and communicate physical deficiencies to a user. The guide outlines procedures for conducting a walk-through survey to identify the subject property’s material physical deficiencies, and recommends various systems, components and equipment that should be used by the field observer and reported in the Property Condition Report (PCR). The scope of the guide includes document reviews, research and interviews to augment the walk-through survey to understand the subject property and identify the physical deficiencies. After a PCA is completed in accordance with the guide, the finished product is a PCR. The PCR incorporates the information obtained during the walk-through survey, the document review and interviews, and includes opinions of probable costs for suggested remedies of certain physical deficiencies identified.

ASTM PCA Objectives/Scope

The objective of an ASTM PCA is to observe and report on the physical condition of the subject property and provide the PCA user with an understanding of the potential immediate, short- and long-term costs associated with the correction of physical deficiencies. To accomplish this objective, the scope of an ASTM PCA essentially involves three components:

• Site walk-through survey: The objective of the walk-through survey is to visually observe the site to obtain information on material systems and components (i.e. roofing, HVAC, electrical, vertical transportation, life safety/fire protection and interior improvements) for the purpose of providing a brief description of the site and identifying deficiencies to the extent that they are observable.

• Documentation review and interviews: The objective of the document review and interviews is to augment the walk-through survey, and to assist with an understanding of the property and identification of physical deficiencies. This portion of the PCA relies heavily on the owner or owner’s representative availability and willingness to provide the requested information. This information may include such documents as appraisals, certificate of occupancy, safety inspection records, warranty information, records indicating the age of the building systems and improvements, historical repair costs and site drawings.

• Reporting: The information obtained during the completion of the PCA is documented in a PCA report. The report includes a brief description of the site along with a description of noted deficiencies. The ASTM PCA provides opinions of the probable cost for corrections segregated into immediate, short-term and long-term costs.

Other PCA Applications

While the majority of PCAs will be used during the property transaction process, the PCA is useful in helping existing property owners and managers manage their assets. The information and budgetary estimates generated by the PCA help identify, estimate and prioritize immediate, short- and long-term maintenance and capital renewal costs for a given piece of property. This information is useful since it allows for accurate budgeting and planning, which is especially important in the retail and office space market as the loss of occupancy resulting from an undiscovered or unanticipated project can be costly.

Where To Go

As with the ESA market, buyers should beware when it comes to the PCA. The best place to start is with a well-known and respected environmental consulting or architectural firm. The PCA should be performed in accordance with the ASTM standard, and the PCA and ESA can sometimes be bundled, which is typically more cost-effective. Real estate management and investment can be a risky proposition. This is why due diligence processes such as the ESA were developed. Unfortunately, the PCA has eluded many investors and managers, leaving some holding onto properties that are a perpetual money pit. The PCA is a valuable tool to help determine if you are walking into such a situation and can help you prepare for management of your asset.

Kent Johnson is senior manager with Indianapolis-based August Mack Environmental.

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