What Is a Property Condition Assessment?
Most commercial property purchases include a property condition assessment (PCA) as part of the due diligence process. Because it sometimes is just a box to check on a form, many people involved in the process don’t understand what the PCA is, why it’s important, or how to make sure it serves its purpose properly.
Fortunately, it’s really not that complicated. Put simply, a PCA is the commercial version of the home inspection that lenders require, prior to a residential purchase. It provides risk mitigation for the buyer and the lender and, potentially, an opportunity to renegotiate the price based on the true condition of the property.
What’s different in a PCA versus a home inspection is the complexity of the investigation. From the physical size of property improvements to the complexity of HVAC, electrical, plumbing, roofing and other systems, a commercial property requires a much more detailed and knowledgeable investigation to ensure proper due diligence.
What Is—and Is Not—Included in a Property Condition Assessment
A property condition assessment includes an evaluation of all the improvements on the site, including the building, parking lots, landscaping, utilities, outbuildings, signage, and roads. It evaluates the current condition of those components and reports on any that are found to be in poor condition. The PCA also estimates costs to correct any deficiencies. The PCA should follow the latest ASTM standards, and include estimates, based on up-to-date construction costs.
Often referred to as a “baseline property condition assessment,” a PCA specifically will not include destructive testing (for instance, taking down walls to find a source of water intrusion) or any investigation that requires climbing a scaffold. It will also not include assessment of upcoming maintenance or repairs that may be required in the near future.
What Is an Environmental Site Assessment?
A Phase I Environmental Site Assessment, commonly referred to as an ESA, or Phase I ESA, is completed to research the current and historical uses of a property as part of a commercial real estate transaction. The intent of the report is to assess if current or historical property uses have impacted the soil or groundwater beneath the property and could pose a threat to the environment and/or human health. If these issues are found, it presents a potential liability for the lender and/or owner, as well as affecting the value of the property. A Phase I ESA completed prior to the closure of a real estate transaction can be used to satisfy the requirements of CERCLA’s (Comprehensive Environmental Response, Compensation and Liability Act) innocent land owner defense under All Appropriate Inquiries (AAI).
Phase I Environmental Site Assessment reports can be completed on all types of properties including vacant land, agricultural, multi-family residential, commercial, and industrial uses; however, all Phase I ESA reports are completed to comply with ASTM E1527-13 (exceptions are made for properties comprised of large primarily undeveloped land, which can be researched under ASTM E2247-16). A Phase I ESA typically includes the following:
This research is evaluated by the Environmental Professional (EP) to identify potential environmental risks to the property such as current or historic operations that are known or suspected to have used hazardous substances or petroleum products during onsite operations. Some very common uses of concern are: dry cleaners, gas stations, auto/vehicle repair, printing operations, and manufacturing. In addition to potential soil and groundwater contamination, ASTM E1527-13 addresses the concerns associated with contamination in soil vapor and the potential for vapor migration to pose a threat to onsite and offsite tenants.
While not part of ASTM requirements, Phase I ESA reports typically include a discussion of observed suspect asbestos containing materials (ACM), potential lead-based paint (LBP), and mold growth; as well as the potential for lead in drinking water and radon. Sampling for these non-ASTM concerns is beyond the scope of a standard Phase I ESA, but can be included upon request.
ASTM E1527-13 provides the guidelines for a Phase I ESA report to meet industry standard, but there are other factors to consider when ordering a report. Projects associated with Fannie Mae, Freddie Mac, U.S. Department of Housing and Urban Development (HUD), and the Small Business Association (SBA) each have their own report requirements. This is also true of other lending institutions.
Once a Phase I ESA is complete, the Environmental Professional will summarize what concerns were identified on the property and make recommendations about what actions, if any are needed to address these concerns. A recognized environmental condition (REC) indicates known contamination or the potential for the subsurface to have been impacted by contamination (either from the subject property or possibly from an offsite source). A controlled recognized environmental condition (CREC) identifies that the property has been impacted by contamination which has been investigated and remediated; however, contamination remains and would require additional work if redeveloped. A historical recognized environmental condition (HREC) identifies a release impacted the subject property which has been investigated and remediated meeting unrestricted use criteria.
The identification of a REC will often include a recommendation for a Phase II Environmental Site Assessment to collect soil, groundwater, and/or soil vapor samples from the subsurface to analyze for the presence of contamination.
Most commercial property purchases include a property condition assessment (PCA) as part of the due diligence process. Because it sometimes is just a box to check on a form, many people involved in the process don’t understand what the PCA is, why it’s important, or how to make sure it serves its purpose properly.
Fortunately, it’s really not that complicated. Put simply, a PCA is the commercial version of the home inspection that lenders require, prior to a residential purchase. It provides risk mitigation for the buyer and the lender and, potentially, an opportunity to renegotiate the price based on the true condition of the property.
What’s different in a PCA versus a home inspection is the complexity of the investigation. From the physical size of property improvements to the complexity of HVAC, electrical, plumbing, roofing and other systems, a commercial property requires a much more detailed and knowledgeable investigation to ensure proper due diligence.
What Is—and Is Not—Included in a Property Condition Assessment
A property condition assessment includes an evaluation of all the improvements on the site, including the building, parking lots, landscaping, utilities, outbuildings, signage, and roads. It evaluates the current condition of those components and reports on any that are found to be in poor condition. The PCA also estimates costs to correct any deficiencies. The PCA should follow the latest ASTM standards, and include estimates, based on up-to-date construction costs.
Often referred to as a “baseline property condition assessment,” a PCA specifically will not include destructive testing (for instance, taking down walls to find a source of water intrusion) or any investigation that requires climbing a scaffold. It will also not include assessment of upcoming maintenance or repairs that may be required in the near future.
What Is an Environmental Site Assessment?
A Phase I Environmental Site Assessment, commonly referred to as an ESA, or Phase I ESA, is completed to research the current and historical uses of a property as part of a commercial real estate transaction. The intent of the report is to assess if current or historical property uses have impacted the soil or groundwater beneath the property and could pose a threat to the environment and/or human health. If these issues are found, it presents a potential liability for the lender and/or owner, as well as affecting the value of the property. A Phase I ESA completed prior to the closure of a real estate transaction can be used to satisfy the requirements of CERCLA’s (Comprehensive Environmental Response, Compensation and Liability Act) innocent land owner defense under All Appropriate Inquiries (AAI).
Phase I Environmental Site Assessment reports can be completed on all types of properties including vacant land, agricultural, multi-family residential, commercial, and industrial uses; however, all Phase I ESA reports are completed to comply with ASTM E1527-13 (exceptions are made for properties comprised of large primarily undeveloped land, which can be researched under ASTM E2247-16). A Phase I ESA typically includes the following:
- A site visit to observe current and past conditions and uses of the property and adjacent properties;
- A review of federal, state, tribal, and local regulatory databases including, but not limited to, underground storage tanks (USTs), aboveground storage tanks (ASTs), known or suspected release cases, the storage of hazardous substances and disposal of hazardous wastes including petroleum products, and institutional and engineering controls;
- A review of historical records, such as historical aerial photographs, fire insurance maps (Sanborn maps), historical city directories, and historical topographic maps;
- A review of state and local agency records, including but not limited to state environmental agencies, Building Departments, Fire Departments, and Health Departments.
- Interviews with current and past property owners, operators, and occupants, or others familiar with the property.
- Interviews with the Report User for title or judicial records for environmental liens and activity and use limitations (AULs); specialized knowledge or experience; actual knowledge; commonly known or reasonably ascertainable information; the reason for a significantly lower purchase price; and the reason for the preparation of the Phase I ESA. It is the User responsibility to provide this information to qualify for the innocent landowner defense.
This research is evaluated by the Environmental Professional (EP) to identify potential environmental risks to the property such as current or historic operations that are known or suspected to have used hazardous substances or petroleum products during onsite operations. Some very common uses of concern are: dry cleaners, gas stations, auto/vehicle repair, printing operations, and manufacturing. In addition to potential soil and groundwater contamination, ASTM E1527-13 addresses the concerns associated with contamination in soil vapor and the potential for vapor migration to pose a threat to onsite and offsite tenants.
While not part of ASTM requirements, Phase I ESA reports typically include a discussion of observed suspect asbestos containing materials (ACM), potential lead-based paint (LBP), and mold growth; as well as the potential for lead in drinking water and radon. Sampling for these non-ASTM concerns is beyond the scope of a standard Phase I ESA, but can be included upon request.
ASTM E1527-13 provides the guidelines for a Phase I ESA report to meet industry standard, but there are other factors to consider when ordering a report. Projects associated with Fannie Mae, Freddie Mac, U.S. Department of Housing and Urban Development (HUD), and the Small Business Association (SBA) each have their own report requirements. This is also true of other lending institutions.
Once a Phase I ESA is complete, the Environmental Professional will summarize what concerns were identified on the property and make recommendations about what actions, if any are needed to address these concerns. A recognized environmental condition (REC) indicates known contamination or the potential for the subsurface to have been impacted by contamination (either from the subject property or possibly from an offsite source). A controlled recognized environmental condition (CREC) identifies that the property has been impacted by contamination which has been investigated and remediated; however, contamination remains and would require additional work if redeveloped. A historical recognized environmental condition (HREC) identifies a release impacted the subject property which has been investigated and remediated meeting unrestricted use criteria.
The identification of a REC will often include a recommendation for a Phase II Environmental Site Assessment to collect soil, groundwater, and/or soil vapor samples from the subsurface to analyze for the presence of contamination.
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