What Lenders Want in a Property Condition Report: Banks, CMBS and Agency Underwriters

A property condition report has three readers with different questions. The buyer wants a negotiating schedule. The lender's underwriter wants to size two numbers and confirm they can rely on the document. The rating agency behind a securitised loan wants to know the underwriter did that. Writing for the lender means knowing which numbers they lift from the report and where they look for them.

The two numbers

Immediate repairs. Underwriters commonly require the immediate-repair total to be escrowed at closing, often at 100 to 125 percent of the opinion of cost, with the work completed within a set period. Every dollar in the immediate column is therefore a dollar the borrower posts at closing, which is why the category has to be defended item by item against E2018-24's three tests (imminent life safety, escalation if uncorrected, code violation) and why a padded immediate list gets the report sent back by the borrower's side.

Replacement reserves. The reserve table is normalised to a per-square-foot (or per-unit) per-year figure and compared with the lender's underwriting assumption for the asset class; that figure is collected monthly for the life of the loan. Underwriters check the term (banks often accept ten years; CMBS conduits typically want twelve, agency lenders the loan term plus two), the inflation assumption, whether roof, paving and HVAC remaining lives are opinions or arithmetic, and whether anything obvious was left off.

Reliance

The lender relies on a report the buyer commissioned, so it needs a reliance letter naming it, and for a securitised loan naming the originator, depositor and trustee as well. The letter references the report date, the scope, the limitations and any conditions of reliance; lenders also expect the consultant's professional liability insurance to be stated. Reports written without a reliance section in the limiting conditions generate a second round of paperwork. See reliance letters.

What a bank underwriter looks for

• The ASTM E2018 citation, the current edition, and a signed reviewer.
• Table 1 with quantities, units and unit costs, not lump sums, and the threshold stated.
• A reserve table over the loan term with a per-square-foot figure.
• The age and remaining life of the roof, the paving, the HVAC and the elevators, with the basis for each.
• Life-safety and code items separated and costed.
• Areas not accessed, and whether they matter to the collateral.

What a CMBS reviewer adds

Rating-agency criteria for property condition assessments in securitised lending are public and specific: a twelve-year reserve horizon is common, reserves are normalised per unit or per square foot, immediate repairs are scrutinised and escrowed, and the reliance letter must name the securitisation parties. The reviewer reads the roof, parking and HVAC lines closely because they dominate the reserve, and reads the limiting conditions for anything that could impair the collateral's value or cash flow during the loan term.

What an agency lender adds

Fannie Mae and Freddie Mac multifamily lenders require their own report formats layered on E2018, with fixed sections, component ratings, prescribed sampling and consultant qualifications. A plain E2018 report will not be accepted on an agency loan. See ASTM vs Fannie vs HUD.

Why reports get sent back

In rough order of frequency: immediate items that do not meet the definition; reserve lines with calendar age printed as effective age; missing unit costs or sources; a reserve term that does not match the loan; no reliance language; the current edition of the guide not cited; areas not accessed without an explanation of why it does not matter; and inconsistency between the summary, the tables and the narrative.

Writing for all three at once

One report can satisfy all three readers if the structure is disciplined: the summary states the totals and the term; Table 1 carries only defensible immediate items with their test; Table 2 carries its basis per line; the limiting conditions carry the reliance language; and the whole thing cites E2018-24 by section. That is the structure Baseline PCR drafts, and the reviewer's checklist in the workspace is written from this list. The sample report shows the result.