Debt versus Equity: you may ask “what is the difference?” when it comes to these two types of Property Condition Assessment (PCA).
Clearly put, a Debt PCA generally facilitates knowledge of an existing property’s condition by identifying potential expenses the property owner can expect to incur in order to maintain a certain level of acceptability over a given loan term. A Debt PCA is generally requested for a property purchase or existing loan refinance. In addition to the general assessment performed during a Debt PCA, an Equity PCA provides a greater or more in-depth knowledge of an existing property’s condition. An Equity PCA is generally requested by an investor, lender or developer, which may have a long-term interest in the property, for the purposes of renovation where an additional infusion of equity is perceived as required. For the consultant, certain basic mindsets are required when approaching these two types of assessments.
From the consultant’s perspective, Debt PCA’s, (typically requested by lenders to gain an overall understanding of a property’s condition which includes establishing certain immediate physical needs and determining a capital reserve fund to ensure the property is adequately maintained over the loan term) should be prepared from a maintenance standpoint. Observations are made on existing materials and current condition, noting in particular what the remaining useful life expectancy of these items are, thus allowing the reviewer to accurately forecast repair or replacement costs over a specific term. Observations would generally include a 10% to 20% viewing of unit interiors. Additionally, the reviewer’s viewpoint on Debt PCA’s should be focused towards deficiencies. Certain common deficiencies a reviewer may encounter are Fire, Life Safety, ADA and FFHAA related items, inadequate parking provisions, trip hazards (heaved concrete), etc. Certain uncommon deficiencies a reviewer may encounter are breaches in draft stop assemblies, inadequately sealed penetrations in firewall assemblies, foundation settlements, failure of waterproofing membranes, excessive truss deflection, etc. It is important to note when addressing deficiencies that while the reviewer may have a certain “fix” in mind, it is important to understand the underlying cause for the deficiency, as if this is missed re-occurrence is likely. At a minimum, the Debt PCA follows ASTM standards.
When addressing Equity PCA’s (typically requested by investors, lenders and, or developers for the purposes of property renovations where a long term interest and additional infusion of equity is anticipated) the consultant needs to not only be conscious of certain deficiencies normally identified within a Debt PCA, but also be conscious of the proposed renovation scope. This may include determining whether an in-depth analysis of certain building components, (roofing, seismic, hazardous materials, waterproofing, etc.) is warranted by a specialty consultant. Furthermore, although the Equity PCA analysis mirrors a Debt PCA to some degree, this PCA analysis could potentially include 100% viewing of unit interiors. Additionally, although certain immediate need requirements and deficiencies can mirror those identified in Debt PCA’s; methods and costs to correct certain issues may not necessarily mirror those identified in Equity PCA’s. Generally, this is determined by the driving philosophy behind the property enhancement. The Equity PCA follows ASTM standards in a more comprehensive format.
Finally, although Debt and Equity PCA’s have many commonalities, it is important to understand the needs of the client and reasoning behind their requirements for a PCA, including budget constraints, enhancement scope, etc. and then meet those needs by providing clear and concise information presented in a useable manner. This information is used either to understand a certain property’s deficiencies in determining short-term and/or long-term maintenance programs, or in understanding what measures may be required to facilitate the purchase/disposal of an existing property.