Building Condition Assessments. What Borrowers Should Know.
Institutional and more sophisticated Lenders routinely require 3rd party prepared Environmental Site Assessments (“ESAs”) and Baseline Property Condition Assessments (“BPCAs”) as a condition precedent to the funding of a commercial mortgage. In a previous post entitled The Role of An Environmental Site Assessor we discussed the importance of ESAs with Larry Backman, of Executive Vice President National Accounts, Environmental Due Diligence & Remediation, Pinchin Ltd.
Today we want to explore BPCAs in more detail. We are joined by Robert McAdam, C.E.T., Senior Project Manager of Building Science at Pinchin Ltd.
What Borrowers should know
YPLP: Prospective borrowers are generally familiar with the need for ESAs. But they may view the requirement for a BPCA with some reticence. Why is this so?
RM: I think for many the BPCA is considered an additional expense and some feel it could bring light to capital expenditures which could prompt a holdback or an undertaking by the lender.
What is covered in a BPCA review?
YPLP: All commercial buildings require some degree of ongoing maintenance and upkeep. The BPCA review goes much deeper doesn’t it?
RM: It does, the BPCA will shed light on which components are deferred of maintenance as well as identifying deficiencies/deterioration which may exist including identifying those components which may be nearing their Projected Useful Life (PUL). In addition to the identification of the deficiencies, the BPCA is a good tool when planning future capex budgeting.
YPLP: Many systems or components are reviewed in a BPCA. Is there an industry wide protocol for such investigations?
RM: The BPCA is a visual review of the roof systems, walls, windows and doors, balconies, structure (including above or underground parking garages), elevators, interior finishes, site features (pavements, hard and soft landscaping etc.), mechanical, plumbing, electrical, fire and life safety systems. The BPCA is completed in general conformance with ASTM Designation E2018-15, Standard Guide for Property Condition Assessments: Baseline Property Condition Assessment Process.
Are certain Building Systems more critical than others?
YPLP: From personal experience I know the importance of assessing an industrial building’s roof condition. From your experience, are there certain building systems which are more critical for review in particular building asset classes?
RM: It’s hard to say if any system is more critical than the roof system of any class of building. Structural components and building envelope are the most critical systems for any class of building as these systems provide support and keep the building water tight. In addition, mechanical systems are critical for all classes of buildings.
YPLP: Apart from imminent catastrophic failure, I presume that in many cases you are advising of the importance of ongoing maintenance and orderly replacement of components/systems?
RM: The intent of the BPCA is to identify and communicate physical deficiencies to the user and this includes the presence of observed defects and deferred maintenance of a property’s material systems, components or equipment. Apart from observed deficiencies, age related component replacements are also noted for future considerations.
What are the Lender concerns?
YPLP: Lenders of course wish to confirm that the building components will last for at least as long as the term of the mortgage granted, correct?
RM: I don’t think that is necessarily true – we include a replacement reserve costs table with our BPCAs which outlines repair and replacement costs for the period of the loan and this is typically used by the lender to determine their risk based on the results of the BPCA.
YPLP: Apart from mechanical and electrical components, building envelope, and structural items, does a BPCA also consider the presence of potentially hazardous materials?
RM: No, the presence of any environmental issues, mould and hazardous materials is out of scope. That being said though, if we observe suspect mould we will recommend removal.
Do you address remediation costs?
YPLP: Is it within the scope of a typical BPCA to reference remediation costs for identified building deficiencies? I suspect this could, and likely is, the basis of ongoing negotiations between buyer and seller in real estate transactions?
RM: Yes – It should be noted however that the costs identified are preliminary Class “D” . They provide only an indication of the order of magnitude of the remedial work. These values have been arrived at by determining a representative quantity from the visual observations made at the time of our Site visit. We also apply current market value unit costs to such quantities or a reasonable lump sum allowance for the work. In many cases, more precise cost estimates would require more detailed investigation to define the scope of work.
Does your review impact building “value”?
YPLP: The quantum of work required, as a result of your investigations, does directly impact building “value” doesn’t it?
RM: It certainly can if the results of the BPCA identify significant corrective work required on the major components.
It is clear that the BPCA has tremendous value for Borrower and Lender alike. Most property owners, and indeed Lenders too, lack the technical know-how to properly assess the physical condition of a building. It’s an important tool for a buyer/owner’s due diligence, and a critical requirement for a Lender’s pre-funding assessment. Thank you Robert for sharing your professional insights.Read More about Pinchin Ltd’s Environmental Due Diligence services here.