Recently we were asked to clarify the various scopes of work available to a client considering an acquisition of the property.
It could be said that there are generally three different levels of third-party engineering due diligence PCAs for properties:
- Level 1: The highest level is a team of specialists working together to perform a detailed evaluation of a facility. Typically employed for more complex buildings such as high-rise offices or historic properties, the level of effort is very high for this work and the fees to the client are in the range of $10,000 to $100,000+ depending upon the scope, facility and specialists involved. Turnaround time for reports will typically be in the 2-3 week due diligence timeframe. We have performed several of these assessments on high-rises office buildings this year and they are a great deal of work in a short amount of time but the quality and depth of the analysis are tremendously beneficial to the client.
- Level 2: The second level of assessment includes the scope that investors have typically requested through the years. This includes an extra level of effort and service in each phase of the project. While usually performed by a single evaluator, the site inspection is conducted by an experienced (likely over 10 years of experience in the due diligence field) and typically licensed engineer/architect. The assessment provides a level of investigation in between that of the team of specialists described above and the cursory baseline ASTM evaluation discussed below. More time is spent at the site and more in-depth interviews are conducted. The fees typically range from $3,000 to $5,000 but are sometimes in the $5,000 to $10,000 range depending on the scope of work and complexity of the property. Turnaround time for reports will typically be in the 1-3 week timeframe depending upon the client requirements.
- Level 3: The lowest level evaluation is a baseline ASTM level PCA that is a cursory review of a property by a single generalist. In many companies, the generalist is usually a relatively junior evaluator with less than 10 years of experience. The consultant fees for this work typically range from $1,500 to $3,000 and the market for this work is primarily focused on the lending/refinancing industry, not the pre-acquisition industry. The fees are less because the reports are ultimately less valuable. The client receives less information and service. For the most part, the ASTM level of reporting is driven primarily by lenders, not investors, whose primary interest is facilitating the transaction. Firms that offer baseline ASTM level PCA firms typically provide Phase I ESA reports as well at generally the same fees. Generally speaking, the nature of the ESA is more black-and-white than that of a PCA where there are many different components at each property and experience of the on-site evaluator is the key to whether or not the client is getting the information they need. Turnaround time for reports will typically be in the 2-4 week timeframe.
There is a place for each of these levels of service depending upon what will serve the client’s needs. Obviously, the level of due diligence in an ASTM baseline PCA is not nearly as thorough as a team of specialists evaluating the property and it is much more likely that unexpected issues and expenses would be encountered post-acquisition. The challenge for the client lies in deciding what level will work best for their investment and risk tolerance.
How do you define your levels of service? What do you think about the way I’ve defined the levels of PCAs? Do you agree, or do you think I’ve overlooked something important? Leave a comment below!