When purchasing commercial real estate (CRE), part of the due diligence process is to complete an inspection, otherwise known as a PCA, or Property Condition Assessment. Whether the building in question is an old building or a new building, this visual inspection, review, and report provide buyers and lenders with a truthful assessment of the property’s current state and future value. A PCA offers many benefits, including peace of mind and the potential for greater profitability.
What is Involved in a Property Condition Assessment?
Very similar to a home inspection, a property condition assessment is an inspection and subsequent report of the interior and exterior conditions of a commercial property. A PCA, performed by a qualified inspector, includes evaluating the:
- Foundation
- Framing and structure
- Roof, flashing, gutter systems
- Structural components, walls, floors, roofs, windows, doors
- Parking lot, outdoor lighting, irrigation, landscaping
- Site drainage
- Plumbing, HVAC, and electrical systems
- Non-cosmetic interior components
- Fire protection systems have current certifications
- Compliance with the Americans with Disabilities Act (ADA)
When finished, the PCA inspector provides you with a brief description of any issues or deficiencies, how long before a repair or replacement may be required, and the potential costs of those repairs. Immediate needs or life-safety issues must be reconciled prior to closing.
Is a PCA Required to Purchase an Old Building? What About a New Build?
Is a PCA required to purchase an old building? While not required, a PCA should generally be performed during the due diligence and Phase 1 environmental study period. This is especially true if the lease is not absolute NNN where the landlord may be responsible for the repair of some items of the building such as roof, structure, parking lot, HVAC, and more.
When obtaining debt to purchase an investment property or refinancing, the lender may require a PCA and insist that you repair any issue yourself or adjust the contract for the seller to do so before closing. Even if you are a cash buyer and a PCA is not “required,” it is wise to perform one to protect yourself from liability and guard the value of your investment.
“If the building is brand new, would I need a PCA?” Some buyers will get a PCA on new construction to ensure it was built to code, not encroaching on other property, and everything is as it should be, but it is not usually required – it’s buyer’s choice. New builds typically come with warranties, such as a 10–20 year roof warranty, which helps mitigate costs if anything major should come up.
Does a NNN Investment Require a PCA?
A PCA is not typically required on an absolute NNN investment due to the nature of a triple net lease. Some buyers will get a PCA to verify the tenant is maintaining the property as stated in the lease. Additionally, if the NNN tenant operates in an old building, it is in the buyer’s best interests to perform a PCA to rule out anything that may come up down the road that could affect the resale value or re-tenanting of the property.
A Property Condition Assessment is a good idea for these types of investments:
- Double-net, gross-lease
- Multifamily residential
- Industrial and warehouses
- Manufacturing facilities
- Office complexes
- Dollar stores
- Pharmacies and drugstores
- Auto parts stores
- Convenience stores
- Fast-food & QSR
- Health care clinics
- Dental clinics
PCA: Negotiation Tool & Buyer Leverage
Most CRE purchase agreements include the option for a PCA as part of the 3-4 week due diligence process, however, buyers often don’t realize the importance of the assessment or the potential value. The PCA is a constructive tool that allows you to forecast the costs, responsibilities, and risks of owning and tenanting an old building or an aging building so you can make the best decision for your goals.
Just as importantly, a property condition assessment can influence the negotiation process and may offer leverage depending on the outcome. If the PCA should come back with a major issue that cannot be resolved by the seller through repair or a price credit for the cost of the issues, then you could terminate the contract and receive your earnest money back.
If you were to purchase an absolute NNN lease property, since the tenant takes care of literally everything, the PCA is less likely to be a factor in your buying decision, and anything that arises from the inspection – should you choose to get one – would be the tenant’s responsibility.
To Wrap it Up – New Building & Old Building PCA Benefits
Whether you are in the process of purchasing a new building, an old building, or one that’s somewhere in-between, doing a PCA before you buy offers many benefits that, in the end, affect your profitability. If you are in the market for a zero-responsibility, absolute NNN property, a PCA may not be necessary, but may still be a wise choice.
Not sure how to find a reputable property condition assessor or where to start the process? Westwood Net Lease Advisors is here for you. Our advisors primarily represent buyers and have a nationwide network of professional resources that provide the level of care and expertise you deserve.
We will represent you and your best interests from the planning stage of the buying process through closing and beyond, at no cost to you. There is absolutely no obligation if you wish to contact our team today for more information about PCAs or the buying process. 314-997-5227
