Questions? email us

Going beyond ASTM – Property Condition Assessments

The satisfactory completion of real estate transactions relies on the satisfactory completion of due diligence. The broad definition of due diligence includes a number of non-physical issues, such as leases and contracts, property title issues, taxes and assessments, approvals and entitlements, historic and open space provisions and personal property.

The physical issues related to a property are evaluated using several defined investigative procedures. These include Property Condition Assessments (PCA), Environmental Site Assessments (ESA), ALTA property surveys, zoning studies, seismic risk assessments and energy studies, which are now required in many states and cities as part of a real estate transaction.

There are two documents developed by ASTM International (formerly American Society for Testing and Materials) which contain the generally accepted standards in the real estate industry for PCAs (ASTM E-2018) and ESAs (ASTM E-1527). These are in general use in the industry and accepted by both investors and lenders.

Going Beyond the Standard Scope
However, there are some investors who have performance requirements that go beyond the ASTM documents. These could be pension funds, pension fund advisors, insurance companies and real estate investment trusts, who deal with large transactions and carry greater risk because their clients rely directly on the investments they make. They may have risk managers or departments whose responsibility is be sure the investments, both real estate and other types, fit the corporate risk profile.

I have spent much of my career with both sides of the table: consultants who perform the PCAs and ESAs, and clients who advise or are equity investors. During this time, I have come across many requests for additional items that expanded the PCA beyond the standard scope.

This will be the subject of two blogs: in this blog I will discuss when and how clients go beyond the standard scope for a PCA, and another blog will cover the Phase I ESA. It is important to remember that a customized scope of work can increase the cost and delivery time of a report, and should be discussed by client and consultant before their contract is finalized.

ASTM E-2018 – the standard for Property Condition Assessments
ASTM E-2018 is the Standard Guide for baseline Property Condition Assessments. The guide has a standard scope of work, but also recognizes that “…there are varying levels of property condition assessment and due diligence that can be exercised that are both more and less comprehensive than this guide, and that may be appropriate to meet the objectives of the user”. To accommodate this, ASTM E-2018 includes additional sections describing out-of-scope due diligence services that can be performed at the option of the client: Annex A1 and Section 11.

Annex A1: “Specific Property Types”
Annex A1 lists special items that are not included in the baseline, but can be selected to supplement the PCA process. Some examples my clients have requested throughout the years include:

1. Parking Counts (Annex A1 gives two options: base the count on drawings or actual field counts).
2. Multifamily Units Count (Again, the annex gives two options: count based on drawings, actual field counts).
3. Calculations of Building areas (Annex 1 gives options for gross and net usable area; measurement from drawings and field measurement. Low rise buildings had sometimes been field measured).
4. Investigation of Third Party Service companies records (While this may be helpful I have not often seen it requested).

Section 11: “Out of Scope Considerations”
Section 11 of the ASTM E-2018 lists activities and additional physical condition items that are generally excluded from the scope of the PCA, but that clients can choose to include. Costs for these would be in the consultant’s fee proposal.

“Active Exclusions” include identifying capital improvements or upgrades and testing equipment. Also excluded are engineering calculations to confirm HVAC, electrical, plumbing and structural systems have adequate capacity for the property. This is often a necessary part of a PCA on a major property, and to this end the consultant will provide one or more specialty subcontractors to assess structural, façade, HVAC, plumbing, electrical, fire protection, life safety and vertical transportation systems.

“Additional Issues“ which the client may select include: Seismic, Design Conditions for Natural Disasters, Insect Rodent Infestation, ADA Requirements, FHAA Requirements, Mold, Indoor Air Quality and Security Systems.

Going Beyond: some real-life examples
I perused a number of past reports, and picked some examples of additional items that clients chose to go beyond the standard scope of the PCA:

1. Evaluate soils reports prepared at the time of preliminary site investigation.
This type of report assists the structural engineer in foundation and superstructure design. The report would include recommendations for foundation design and, if foundation drawings are available, these would be checked against the report
2. Report on the condition of underground utilities.
3. Calculate replacement costs.
4. Make a personal visit to the building/zoning/fire departments to get records.
5. Provide a copy of the original building permit. If not available, then obtain a copy of the most recent certificates of occupancy.
6. Answer the following questions – What does the zoning code consider a “Total Loss” in the event of a major disaster? In the event of a Total Loss would the property have to be built to the current zoning code (setbacks, parking and others)? If so, would there be significant changes to the property that would affect its economic viability (increased setbacks, smaller footprint, increased parking, smaller footprint, current use still allowed)? In the event of a smaller loss, could the property be rebuilt as is and be considered “legal nonconforming”?
7. Are the fire sprinklers in place manufactured by Central Sprinkler between 1989 and 2000 (and thus subject to recall)?
8. Provide information on the energy efficiency of the building and systems including, if available, the building’s Energy Star rating and LEED certification. Provide a description of improvements that have been made or are planned to be made to increase efficiency or improve the sustainability of the property.
9. Where the seismic analysis shows a Scenario Upper Loss from the Design Basis Earthquake and the proposal provided for it, prepare a recommendation for structural modifications to achieve a loss of 15% with preliminary costs.

Closing Thought
Client specific requirements should, of course, be a topic when you’re introducing your company for the first time. Pricing the work will always be difficult. It’s a business risk with possibly a larger return for a long term relationship.

 

Be Sociable, Share!

Related Posts

Why PCAs are a Valuable Tool for Investors and Lenders

A closer look at the new ASTM E2018-15 Standard Guide for Property Condition Assessments

Due Diligence Changes in the Multifamily World

Leave a Reply

You must be logged in to post a comment.

css.php