In this blog post…
- What is a Property Condition Assessment Report (PCA)?
- What does a PCA entail?
- Transition Report & Reserve Study vs. The Property Condition Assessment Report
- What Types of Additional Property Reports Are Available?
- Property Condition Assessment Report vs. Facility Condition Assessment
- Which Property Condition Assessment Report Do I Need?
- Why Obtain a Property Condition Assessment Report?
- Who Should You Hire to Perform a PCA?
Do you need a Transition Report & Reserve Study or a Property Condition Assessment Report?
When dealing with homeowner associations (HOAs) and property managers for residential communities, condos, etc., we often get requests to provide a Property Condition Assessment (PCA). However, the PCA is not the right product to address the unique reporting needs of HOA’s and property managers of Common Interest Real Estate (CIRE) market products, which include properties such as residential communities, condos, co-ops, timeshares, etc.
Property Reporting Variations
There are many report variations to a PCA, developed over the years in response to unique reporting and analysis needs of other parties in the real estate industry; for example, Disposition Reports, Compliance Reports, Completion Reports, Transition Reports, and Reserve Studies. These specialized reports were developed to address reporting needs specific to the client needs. Aside from Reserve Studies*, none of these other report variations are governed by national standards. The subject of this paper is to compare the PCA to the two report types typically provided to the CIRE market, Transition Reports and Reserve Studies.
Following a brief introduction to PCAs, this content will also cover the subject of the property condition assessment report in further depth to account for the differences between the additional real estate reporting methods.
What Is a Property Condition Assessment Report (PCA)?
A property condition assessment report (also referred to as a “property condition report” or “PCR”) can be invaluable to buyers and sellers during commercial real estate transactions. However, property condition assessment reports are often confused with several other types of real estate assessments.
The PCA was developed to meet commercial real estate lender requirements for mergers, acquisitions, and refinancing situations, and is prepared in accordance with ASTM E2018. The primary purpose of a PCA is to identify undisclosed issues (such as deferred maintenance and faulty construction), and to provide unit cost benchmark data from which to appraise the true value of a property. PCA reports consist of a narrative report describing each property improvement, the cost of required repairs, and a budget for major capital expenses anticipated to occur during the term of the real estate loan plus two (2) years.
What Does a Property Condition Assessment Report Entail?
Before we compare the Transition Report and Reserve Studies to the Property Condition Assessment, let’s briefly review what a PCA report entails.
In short, a property condition assessment is designed to evaluate the short and long-term capital expenses needed to maintain a property. The general scope of a property condition report is outlined in ASTM E2018, a set of regulations created by ASTM International.
A property condition assessment includes a thorough walk-through of the asset being analyzed. During the walk-through, the assessor will examine the condition of components, systems, and materials, such as:
- ADA compliance equipment
- Electrical wiring
- Plumbing and fixtures
- Mechanical equipment
- Fire protection mechanisms
- Site improvement concerns (parking lots, etc.)
Upon completing the inspection, the assessor will conduct a comprehensive report that outlines immediate repairs, long-term expense estimates, and other potential expenses related to asset upkeep.
Furthermore, when issues are identified, cost estimates are provided to correct the issue, which are then summarized in an immediate repair budget. The purpose of the repair budget is for the lender and purchaser to identify those items not disclosed by the seller that need to be addressed to bring the property to par condition.
As part of the negotiation process, the seller agrees to either correct the deficiencies, or the sales price is adjusted, thereby leaving the repairs to be accomplished by the purchaser after the sale. If repairs are to be accomplished after the sale, the lender will either reduce the loan amount or establish an escrow account based on the repair budget. When repairs are escrowed, the escrow funds are released once the repairs are accomplished. Lenders will typically set the escrow at 1½ to 2 times the total value of the immediate repair budget.
Capital Replacement Budget
As previously noted, in addition to the immediate repair budget, a capital replacement budget is provided for the term of loan plus two (2) years. The capital replacement budget is limited to just those major expenses that are not included in common area maintenance (CAM) for retail products or in annual operating budgets for residential products. Typically, the PCA capital replacement budgets are limited to about one-half dozen major budget items required to establish a per-unit cost that can then be compared with nationally recognized benchmark data.
The primary reason for the PCA capital replacement budget is so the lender and purchaser can compare actual budgets to their respective nationally-recognized unit cost database so a fair appraisal value of the property can be made. Therefore, the preparer of these capital replacement budgets must have experience in the market he is providing budgets for as to which expenses are to be included, and which are not. PCA capital replacement budgets are not intended to establish Reserve Study budgets and funding plans.
Transition Report & Reserve Study vs. The Property Condition Assessment Report
Although the Transition Report and Reserve Studies share similar concepts with a PCA and PCR, there are significant and fundamental differences.
The Transition Report and Reserve Study need to be and are provided as two separate and independent reports, versus the PCA which is one combined report. The Transition Report is written to strictly identify repairs and those issues not properly constructed in accordance with design documents and industry standards. However, cost estimates associated with such issues (such as those items detailed and priced in a PCA immediate repair budget) are not included in a Transition Report. The reason pricing is not included is because in situations where the developer is responsible for addressing these issues, the price is irrelevant. In the event the developer refuses to take responsibility and address certain issues, costs associated with such then may become relevant, assuming legal recourse is pursued. These costs would be addressed at that time with the client and client’s counsel.
Reserve Study budgets are prepared in accordance with National Reserve Study Standards (NRSS), versus the PCA replacement budget, which is prepared in accordance with ASTM 2018. It too should be noted that the consultant preparing a Reserve Study must take into account any reserve funding requirements of the property covenants and others as may be dictated by state law.
The NRSS Reserve Study budget typically results in considerably more budget detail/expenses than the typical PCA replacement budget. A primary purpose of the Reserve Study budget is to manage funding for all expenses not part of the annual operating expense budget. More importantly, NRSS requires the consultant to provide various reserve funding plan options. Reserve funding plans are not a requirement of a PCA. As previously discussed, the PCA capital replacement budget is a replacement budget limited in scope specific to its respective market budgeting practices, so its findings can be analyzed and compared to nationally recognized unit cost data. This data is used for evaluating and approving loan appraisals for real-estate transactions and financing, not for managing properties and establishing reserve funding plans.
Want to learn more about reserve studies? Check out our blog 3 tips for hiring the best reserve study provider.
In order to further help you determine which type of property report is ideal for your needs, the team at zumBrunnen has created this detailed guide below to outline how you can find the ideal partner for your needs.
What Types of Additional Property Reports Are Available?
While property condition assessment reports are by far the most well-known commercial asset assessment type available, several other analyses are available. These include the following:
- Facility condition assessment
- Disposition report
- Completion report
- Transition report
- Compliance report
Unlike PCAs, disposition reports, completion reports, transition reports, and compliance reports are not governed by national standards. However, they help meet very specific client needs that do not require a more comprehensive analysis, such as a PCA.
For instance, a completion report is conducted when a project has been completed. This type of report verifies that the subject property was built and completed per applicable building standards.
Lenders or investors may require building owners to provide them with a completion report as a means of verifying that funds were used for their intended purpose.
The facility condition assessment is the analysis option that is most similar to the property condition report. In light of that fact, we have devoted an entire section to those two assessments below.
Property Condition Assessment Report vs. Facility Condition Assessment
It is important to understand the difference between a property condition report and a facility condition assessment when seeking asset analysis services. However, this can be rather challenging due to the similarities between these two analyses.
To recap, a PCR or PCA is generally performed before a commercial real estate transaction takes place. The inspector will conduct a thorough walkthrough of the asset and provide the potential buyer with a detailed report that outlines the projected cost of maintaining the property. These costs will be divided into immediate needs and long-term maintenance concerns.
Conversely, FCAs are often conducted by a property manager or owner who intends to retain the asset for an extended time. During an FCA, the inspector will identify existing system deficiencies.
They will also assess the property to determine the building’s capital replacement needs, safety and code compliance, the remaining useful life of existing building systems, and the total cost of building replacement. In addition, they will provide the client with a prioritized list of recommended repairs.
Whereas PCAs help buyers understand risk tolerance to make an informed purchasing decision, FCAs are designed to assist asset owners with long-term capital management planning.
Which Property Condition Assessment Report Do I Need?
If you are interested in purchasing a property and want to assess your risk tolerances carefully, then a property condition report is most likely the right solution for you. However, if you are the current asset owner or manager and need insights to aid your efforts in capital planning, an FCA would be the more appropriate option.
The most effective way to determine which type of property condition report is the best option for your endeavor is to connect with a reputable PCR firm. These professionals will be able to direct you to the ideal analyses based on your organization’s needs.
Our team of experts at zumBrunnen are ready to help you, just contact us here!
Why Obtain a Property Condition Assessment Report?
The most notable benefit of a property condition report is risk mitigation. As you know, making wise investment decisions is the key to achieving sustained success within the commercial real estate industry.
In addition, a comprehensive property condition report that a qualified agency conducts will give you invaluable insights into a building’s financial performance. A PCA will provide a detailed understanding of immediate maintenance concerns, short-term structural repair needs, and long-term capital expenses.
Who Should You Hire to Perform a PCA?
First and foremost, you should find an assessment firm with a wealth of industry experience. Such a partner will be able to provide relevant insights about the state of the asset in question. They know what to look for during an inspection and can provide more accurate projections regarding maintenance costs, repairs, and so forth.
When speaking with your prospective partner, make sure that you ask plenty of questions. What’s more, it is vital that you are clear about the scope and nature of your undertaking, as this information will help the assessment team identify the correct report for your project.
Property Condition Assessment Reporting Solutions from zumBrunnen
Over the years, the team at zumBrunnen has worked with property owners across a broad range of industries. As a result, our experts have the skills and knowledge necessary to inspect your entire property thoroughly.
The quality of a property condition report can make or break a deal. Our team at zumBrunnen understands risk tolerance and will help you address issues with elite project managers with decades of field experience.
We make good, smart deals possible! Contact us today.
* Reserve Studies are prepared in accordance with National Reserve Study Standards (NRSS).