Often three relatively similar services are provided to communities within the homeowners association industry. Because there is still some confusion about what each service represents, an Association may occasionally have expectations that far exceed the scope of a reserve study (the most superficial of the three services).
The three services are the reserve study, the insurance valuation (or appraisal), and the PCA (or property condition assessment, also known as a project condition assessment). In certain parts of the country, the reserve study is also often called an “engineering study”, which further increases the confusion, since it implies a level of service not contemplated by a reserve study, but more suggestive of a PCA .
What distinguishes these three separate services is their purpose, the methodology used to collect the data, and the data presented in the final report.
The reserve study report is a budgeting tool based on a physical evaluation of the replaceable components of the Association’s common area. The purpose is to prepare a financial forecast (typically for a 30-year period) of future expenses and to understand the reserve contributions needed to fund these future expenses. In a Condominium Association, the replacement of the condo structure itself is generally an excluded component, as it is considered a lifetime structure. However, exterior wall painting, possible siding replacement, and roof replacement would be included in the reserve study as they represent the major replaceable components that are part of the condo structure. The reserve study is based on future replacement costs.
The insurance appraisal report It is a service for evaluating all the components of the Association’s common areas. This list of components of common areas will necessarily include a series of elements that are not considered in the study of the reserve. The purpose is to determine the overall insurable values of the property, to ensure that the Association has adequate insurance. For the purposes of the insurance valuation report for a condominium project, the structure of the condominium is the highest cost item included in the study. Rather than evaluating each of the separate components of that building (i.e. building envelope, roofing, mechanical equipment, etc.), the insurance valuation is generally based on a cost per square foot for construction type replacement. used in the project. The insurance valuation report analyzes Current replacement costs as the basis of the valuation.
The Property Condition Assessment Report (PCA) It is a general assessment of the physical property that results in a report to help interested parties understand the condition of the property. The PCA report should generally include the following items, presented in a clear and easy-to-understand format:
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Summary of visible components of the property, including site development / landscaping, exterior envelope, structural elements, interior finishes, equipment and systems, and handicap accessibility compliance
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Details of any physical defects or damage discovered during the property inspection
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Identification of any maintenance deficiencies.
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Cost estimation to correct the deficiencies observed
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Quality of workmanship
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Quality of the construction materials used.
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Statement of report terms and conditions
The PCA can be viewed as a combination of both the Reserve Study Report and the Insurance Appraisal Report.
First, like the insurance appraisal report, it considers all the components of the property, not just the replaceable components. But unlike the insurance appraisal report, it does not attempt to come up with a general appraisal for the replacement of the project. The PCA is based on Current costs.
Second, like the reserve study, you must identify any observed physical defects or damage and provide a cost estimate to correct any observed deficiencies. The PCA does not use future costs. The contact names and numbers of the vendors who provide maintenance and replacement of systems are generally included in the PCA.
What are the benefits of a PCA? Provides an expert assessment of construction quality and integrity of related building systems, and identifies repair costs necessary to bring the project to normal condition. In this way, readers of the PCA report receive the information they need to make critical decisions. For commercial real estate transactions, the PCA is very important to lenders and investors related to the potential purchase of real estate. Insurance underwriters use the report to set rates. Within the homeowners association industry, the PCA can often be a guide in determining the scope of future repairs and possible replacement with alternative products. In a more extreme example (and we’ve seen this happen more than once), you can help the Association’s board of directors determine whether a particular building can be salvaged through repairs or needs to be demolished and replaced. We have seen 40 year old clubhouses that were not properly maintained, razed and replaced with new multi-million dollar clubhouses. In some associations, aesthetic values also weigh heavily in such decisions.
PCA service providers are generally architects, engineers, or contractors who have extensive construction knowledge. The service provider needs to know the latest industry standards for structural components. Familiarity with construction products and materials and knowledge of mechanical equipment, fire protection (such as sprinkler / alarm systems), lighting, and other interior systems are also important.
While it is desirable for a reserve survey provider to have the same level of knowledge, the reserve survey is a budgeting tool and as such is a more superficial analysis that does not require the same level of knowledge. The reserve study report should be a reflection of the Association’s maintenance plan. Therefore, there is much more reliance on knowledge of the Association’s operating and reserve maintenance activities, as well as interaction with the providers that provide those services.