Red Flags In PCA – Recognizing Catastrophic Conditions

If catastrophic conditions are present at the property putting the physical condition and the occupants at risk, properly qualified professionals must understand and know how to navigate the problem.  As a commercial real estate investor, there are items that present red flags which complicate negotiations between parties on the deal.

When they’re identified during the PCA, it can send the deal into a spiral causing those involved to think “Oh great (or more likely a colorful four letter word), this is going to hold up everything!”

Red flags can be categorized into the following concerns:

  • Structural failure
  • Fire hazards
  • Safety concerns
  • Water mismanagement

The most critical reaction is timely, open, and thorough communication.  Red flag issues need to be addressed timely so deals are not delayed.

Our duty as PCA professionals is to report the issue, investigate the history of the issue, and present recommendations for correcting the problem.

While onsite, the information and documentation collected is critical.  Is it very isolated?  Is it systemic?  Taking lots of photos and quick inventories helps those involved in the deal understand the scope of the issue and makes negotiations smooth for those who are not able to see the property first attempts.

What should be noted as a part of our visual assessment and reporting:

  •   Cause (i.e. is the water intrustion coming from a pipe leak or flood from nearby creek)
  •   Extent (area, size, location)
  •   Cost to Cure – Not only must we eliminate the cause, but also assess repair current damages are included in the immediate repair table

Interviews with onsite staff and management helps support decisions on practical solutions.  Asking questions like ‘What attempts have been made to remedy the issue in the past?’ help the deal team have an understanding of how to move forward with the risk.

Critical thinking is essential.  We must be thinking, discussing, and reporting on the possibility for re-occurrence of certain items. There could be future foundation settling due to soils issues or future flood events based on location.

Sometimes, we need other experts to evaluate the issue, this can slow down a deal considerably.  But determining mitigation of the issue takes precedence.  What’s most important is to communicate a property condition problem early in the due diligence period.  Issues happen, and having experienced and knowledgeable team helps move the deal along appropriately.

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