Jan 19

“Debt” versus “Equity” Style Property Condition Assessments

A property condition assessment can be tailored in scope of work to either an investor-buyer or investor-lender report format. The investor-buyer format, also known as “Equity” style, is thought of to be focused on protecting the buyer’s financial interests. Alternatively, your investor-lender format, known at the “Debt” style report, will typically be written to protect the lender’s financial interests. In either scenario, a good case can be made which assumes protecting the lender’s equity is by nature protecting the buyer’s stake in the project. However, an equity type property condition assessment is typically thought to be more granular with an emphasis on the current state of the building wheres a debt style property condition assessment would be presented more as a forecast of future anticipated building investments over the life of the loan. In summary, a property condition assessment is a general overview of the buildings condition and then can be formatted to accommodate the different potential audiences.

Jan 08

Making the Case for Property Condition Assessments

When purchasing commercial property should be helpful to take into account the physical condition of the building. Doing so will afford you the opportunities to 1) adjust your purchase price to reflect future capital requirements and 2) plan for the inevitable maintenance which comes with all buildings.

Just as a savvy business investor will compare the CAP rate of buildings when assessing investment opportunities, the same consideration should be taken into account in respect to where the building systems are in their expected useful life cycles. For instance, a building built 20 years ago will inevitably be coming up for new roof system, heating and cooling system and possibly other needed investments for the building to remain in serviceable condition. A property condition assessment is aimed at providing the investor just this information.

Commercial Building

Future repairs will be needed whether or not the investor wants to adjust their presumed purchase to reflect expected cash expenditures. The same example with the 20 year old building can be used to illustrate this point. A 20 year old rubber membrane roof, if not replaced at 20 years of age, will begin requiring increased maintenance expenditures as the membrane continues to deteriorate causing water penetration into the top floor space. Either way, the cost of maintaining the roof will impact your financial performance of the building. Property condition assessment can be a useful tool for planning around these inevitable cash outlays.

In closing, the cost of maintaining a building over the life of your loan will one way or another impact your cash flow, so why not take the prudent path and incorporate these inventive costs into your purchase decision.