When retail tenants are responsible for maintaining the property they lease, property owners and managers can find themselves in the uncomfortable position of holding tenants accountable for maintenance or risking devaluation of their asset due to damage or neglect.
In a perfect world, each party understands their respective maintenance responsibilities and upholds them with transparency and minimal conflict. In the real world of retail real estate, however, interpreting and applying lease terms can be a messy business, particularly when it comes to property condition and maintenance. Owners and occupiers alike can benefit from a tool that helps them understand the condition of a property and the cost of maintaining it within the framework of their lease agreement.
A Property Condition Assessment (PCA) is a commercial building inspection specifically designed to document the condition of a property, identify deficiencies, and provide data regarding the cost of immediate repairs required, as well as long-term repair and capital expenses. While typically performed upon the sale/purchase of a property, a PCA is a great tool to assess and document the condition of a retail space, too—particularly for anchor tenants or net-leased spaces—and identify needed repair at the commencement or termination of a lease. All major improvements and building systems are included in the assessment, which may be performed to establish a baseline when a new tenant takes possession of the property, when a tenant vacates, or, ideally, at both entrance and exit of a lease. When performed by a quality inspector and used properly in the context of a retail lease, a PCA allows the lessor and lessee to equitably manage the condition of a property and provides a foundation for a smooth lease exit.
Customize it for your lease and your property
When ordered by a property owner who has a pending lease exit or entrance, or by lessees who are entering or exiting leased properties, a PCA can be tailored to the terms and conditions of the lease agreement, which typically provide a standard for returning the property in like condition, excepting normal wear and tear. It can be customized to provide as much detail as is helpful and will include items that might otherwise be overlooked, including potentially expensive items such as replacement of the halogen light bulbs associated with parking lot lighting. The assessment can be performed by an experienced generalist, or specialists may be engaged for specific systems. Because HVAC, roofing, and pavement repair/replacement can be the most expensive building systems to address, you may wish to include inspections by HVAC, pavement, and roofing specialists in the scope of your PCA.
No surprises: expedite repairs/replacements of major building systems
A PCA will identify capital needs and prices of all failing or damaged building systems and safety issues, as well as long-term capital expenses based on the expected useful life of the building systems and components. This allows the responsible party to obtain funding and schedule restoration or maintenance efforts as required for minimal disruption of operations. Furthermore, specialty contractors can provide pricing for the work necessary to restore the property to its pre-lease condition in the form of an executable fee quote on their letterhead. For property owners, this means less research when you're ready to restore the property, saving time so your new tenant can be in place faster. For owners of retail portfolios with many leases in place, PCA data can be delivered and stored digitally for greater visibility and actionability. Those with long-term leases in place may wish to schedule recurring assessments to ensure that tenants are maintaining spaces as required.
Smoother negotiations during the lease exit process
Many retail owners and managers request condition assessments both at the initiation of the lease and at the termination of the lease. Conducting a "lease entry" condition assessment when a tenant takes occupancy provides strong documentation of existing or "baseline" conditions, particularly when supported by extensive photo documentation. When archived and used in tandem with a condition assessment at lease exit, the two assessments allow for comparison of the condition of the property at the beginning and end of the lease term, removing questions of responsibility for property damage or repairs. If you've included a system specialist in the scope of your PCA, the specialist's assessment adds weight and legitimacy to the cost evaluation, as it is submitted as an executable document and attached as a supportive "Exhibit" to the consultant's report.
With any major financial transaction, investing in proper due diligence can save money, time and headaches in the long run. When entering into a retail lease, both lessors and lessees should recognize a PCA as a critical component in their due diligence process.
© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
Leo Bertolino
Leo is a National Client Manager with Partner Engineering and Science, Inc. where he advises investors, lenders, asset managers, and attorneys on commercial real estate due diligence. He is also a Data Center Infrastructure Specialist, certified by the International Data Center Authority. With a background in technical consulting and an intimate understanding of stakeholder needs, Mr. Bertolino has become a trusted advisor to clients on a wide range of engineering, environmental and construction matters.
