314-878-0806

PAY

Pay Invoice

Reserve Study

REQUEST RESERVE STUDY

PCA

REQUEST PCA

Archives for Property Condition Assessment (PCA)

  • Home
  • Property Condition Assessment (PCA)

Reserve Studies vs. Condition Assessment

Reserve Studies vs. Condition Assessment

Q: Over the past few months, I’ve heard a lot of discussion about reserve studies and condition surveys. Are these the same, and, if not, how do they differ, and why and when should our association obtain one?

A: This is a great question because it is not asked often enough. I cannot count the number of times I have responded to a condominium board’s request for a meeting to discuss their stated need for a reserve fund study only to find they actually needed something else. That something else could encompass a wide range of engineering services such as a full structural evaluation; a water infiltration study; and/or a plumbing or electrical system update.

Condo and HOA boards have a lot on their agenda for their periodic meetings. Issues regarding landscaping, by-law enforcement, assessment collections to name a few, so the need to spend money to update their last reserve study is not a popular item. Even though the Community Associations Institute (CAI) and the association’s property manager may recommend a reserve budget update every three to five years, the board members are not eager to look at the calendar.

In fact, most discussions about updating the reserve budget arises from some perceived maintenance problem and not the calendar. Perhaps it is the rise in complaints in water stained ceilings from leaking roofs, or poor curb appeal of the aging building facades, or the developing potholes in the roadways that create the agenda item requiring capital repairs and the analysis of the reserve budget.

With the guidance of an experienced property manager or knowledgeable committee member, the board will recognize the benefit of hiring a professional engineer (PE) and reserve specialist (RS).  These professionals provide the most complete review of the facility’s common elements and will develop a reserve budget reflecting the future scope of repairs and associated cost estimates. With this understanding the board can prepare a Request for Proposal (RFP) and conduct interviews to hire a qualified firm—from there, things can start going wrong.

Common Misunderstanding

They go wrong because of miscommunication due to the lack of understanding of the industry’s language and terminology. Let us assume the condo’s primary concern is structural problems given the recent attention of the Surfside, Florida disaster. The communication problem starts with the engineer’s RFP interview during which the interviewee remarks to the board that one of the advantages of hiring an engineering firm to perform a reserve study is their structural engineers can comment on the potential structural distress issues found during the inspection of the building(s). This can be a point of communication disconnect and the beginning of unfulfilled client expectations.

In the engineer’s mind, he thought he was clear in telling the board his review of the structural elements would produce a report listing the structural problems found and the engineer’s recommendations of actions to be taken. What the members of the board may have heard was for the price of the reserve fund study they would receive an engineer’s structural evaluation of the condition of their facility with an estimate of repair costs to budget for their reserves and for a contractor.

A basic reserve study focuses on estimated remaining useful lives of existing common elements. When structural problems are known before or found during a reserve study, a condition study or assessment is needed to determine the soundness of the facility. This scope of work can be added to the reserve fund study or provided as a separate task. This study may call for inspection, material testing, engineering calculations, and more that are outside the scope of a reserve study. To avoid this, better questions and answers are needed on all sides of the issue.

Article written by Jack Carr, P.E., R.S., LEED-AP, Criterium Engineers
Published in Condo Media December 2021 edition
Download a PDF Version of this Condo Media article

Read more

Liabilities and Risks of Ignoring Issues: An Engineer’s Perspective

Liabilities and Risks of Ignoring Issues: An Engineer’s Perspective

Repairs reserves

Question:

A recent reserve study identified a number of repairs/replacements that should be addressed in the community. However, while the reserve is being funded on a monthly basis, there isn’t enough in the current reserve fund for the repairs/replacements. With inflation and knowing that owners won’t be happy, the board decided not to increase condo fees or approve a special assessment and instead will wait to make the repairs/replacements when the money is available in the reserve fund.

Since the reserve study has indicated that these repairs/replacements should be addressed, how might the board’s decision impact our liability should one of these items fail and/or cause damage to the community or someone is injured by our failure to address the repair/replacement?

Answer:

Unfortunately, underfunded condo or Home Owners Association (HOA) reserves are a common occurrence in New England, especially in communities with buildings greater than 25 years old. Most New England states do not have specific requirements for the level of needed reserves nor even a requirement for a full reserve study. States’ HOA and condo statues do place an obligation of fiduciary duty on boards and their members. They must act in good faith and be prudent and faithful in furthering the association’s best interests. A current reserve study and a properly funded reserve fund are often key to protecting a community’s long term financial health and provide good risk management.

Commissioning a reserve study by the board is a good first step in planning for the future. Problems can arise when the reserve study reports underfunding the correction of current common asset deficiencies. In an ideal world, the board recognizes the importance of these reported deficiencies, initiates a plan to raise the needed funds, and orders repairs. But in reality, circumstances may occur when the board feels the community cannot afford an increase in assessments or will oppose a special assessment to fund the needed improvements. It is at this point the board should be aware it may be incurring significant known and unknown risks and liabilities.

Reputation and Building Risks

Some of these risks and liabilities fall in the “legal” category while others in the “quality of life” or “financial” category. That is, if a member of the community or visitor were to be harmed by tripping on an unrepaired sidewalk hazard or a broken deck component, litigation could ensue. Leaving aside the potential success of this type of litigation or the protection of board of directors by liability insurance, the long-term effect could be damage to the community’s reputation. One of the most important duties of the board is the protection of the owners’ net worth. If the community is seen by the real estate market as a dangerous or risky place to live, its future average unit sale value will be reduced. This situation will signal two red flags to potential buyers: First, it will raise doubts about the latent condition of other community assets; and second, it will underscore the significance of the underfunding and future need of special assessments or other emergency measures for future owners. These circumstances could impact the timing of future unit sales.

Most professional property managers will agree ignoring important repairs or putting off needed improvements typically will only increase the damage and costs over time. Not only will the community’s curb appeal be diminished but so will the desirability of banks providing unit loans or refinancing. Responsible communities recognize it is in their own best interests and will not kick the can down the road but face their current and future fiscal needs. Banks and real estate agents often review reserve studies to understand their investment risks. Having the need for future repairs and improvement projects is not the problem. The problem is not having a plan to carry out or fund the repairs and improvements.

Written by Jack Carr, P.E., R.S., LEED-AP, Senior Consultant Criterium Engineers
Published in Condo Media

Read more

Your Roof: 8 Things to Consider!

Your Roof: 8 Things to Consider!

Image result for roof picture
If your house, condominium or commercial office building is like most built in the last 50 years, it probably has a sloped roof with one of the following roofing materials:
  • composition shingles
  • composite tile
  • cement or clay tile
  • wood shingles
  • metal roofing

Each type of roofing has its unique characteristics. However, there are also some common considerations to keep in mind:

  1. Life – The actual service life of a roof varies according to the location and exposure to sun and weather. You should not assume that the age determines its condition.
  2. Leaks – These are not usually the result of the roofing itself failing. Leaks usually occur due to the failure or improper installation of some related component such as flashing or underlayment.
  3. Resurfacing – When resurfacing a roof, you should strip the existing material to the sheathing to allow for a visual inspection of the sheathing, and replacement of all of the related components.
  4. Stains – If you have dark stains on a composition roof, it is probably mold. Diluted chlorine cleaners and products such as Shingle Shield are effective at removing the growth. New shingles are more fungus-resistant than some of those manufactured in the 1980s and ‘90s.
  5. Trees – Cut back overhanging tree limbs. They can wear a hole in your roof from the wind blowing through the trees.
  6. Gutters – If you have gutters, keep them clean. Gutters full of debris are far worse than no gutters. Debris encourages fungus, which can infect the roof sheathing. Rot and mold are the result.
  7. Wood – If you have wood shingles, make sure that they are treated for fire resistance and that the treatment is kept current.
  8. Clean – Keep your it clean, especially the details around skylights, dormers and valleys, and take note of any change in shape – this is where leaks start.

Your roof has an important job to do—to keep you dry in all kinds of weather. If you take care of it, you will get the most reliable protection and longest life.

Read more

A Pre-Lease Property Condition Assessment Pays For Itself!

Criterium-Hardy Engineers provides the straightforward evaluation required for an extensive Pre-Lease Property Condition Assessment (PCA) for clients looking to lease buildings of all sizes. They are especially useful for Triple-Net Lease negotiations.

Be Informed!

Investing in due diligence and being an informed lessee provides greater confidence in the property, quantitative information for tenants, as well as peace of mind that the property will be appropriate for our client’s expectations.

  • Understand the property’s baseline condition
  • Solid information to make decisions on repairs or replacements, especially for Triple-Net Lessees
  • Detailed information to share with tenants
  • Saves time, money and establishes a baseline, which may minimize conflict with the building owner
  • Benefits all parties involved in the transaction

REQUEST A PROPOSAL!

What is a Pre-Lease Property Condition Assessment?

  • Customized for the client’s business purpose
  • Used in support of real estate transactions
  • Commissioned for lease negotiations and, at times, upon termination
  • Provides an accurate condition of the asset
  • Offers an opinion on the building’s useful life
  • Outlines the probable costs required to repair or resolve any building issues

Details in a Customized Pre-Lease PCA Include

  • Representation of the property’s physical condition, including: property description, site improvements, and building systems
  • Outline of capital needs and opinion on probable costs: short-term repairs or replacements and preliminary capital budgets for the future
  • Recommendations for further study
  • Baseline data to resolve deficiencies and issues
  • Digital photography and informative reference exhibits/documents

Reports vary in length (often exceeding thirty pages) and are based on building size and complexity—for example a report prepared for a 35-story downtown office building, differs greatly from that for a 1,800 square foot retail space.

The average building PCA reviews more than 30 major building and site elements in great detail. It provides descriptions, deficiencies and recommendations. It also includes probable costs for repair or replacement of damaged or failing building systems or safety issues. PCA reports are customized for each client and may be designed to focus on areas that otherwise may not be covered in a baseline assessment.

What Does a Pre-Lease Property Condition Assessment Cost?

$3,000-5,000 (average) and long-term savings: tens of thousands (on average)

Read more

Foundation Forensics

Crack in a foundationCracks in foundations are by far the most common structural complaint raised in either reserve fund studies or transition studies.   They can occur in the youngest or newest condo building. As condo documents usually assign the maintenance responsibility of their repair to the association, board members and property managers take them very seriously.  Missouri condo buildings have many types of foundations including concrete block; brick; and mortared stone with the most common being poured concrete.

Most basements and garages have 4 to 6 inch concrete slabs and unless this is a slab-on-grade foundation, the slabs were poured independently of the foundation walls.  They are said to be ‘floating’.  Often the construction joint between the slab and wall can easily be seen.  The common slab crack complaint is hairline cracks appearing in spider web-like patterns.  These cracks can show up shortly after construction and are normally caused by shrinkage during the curing process.  The key point here is this type of slab cracking is rarely a structural problem, for after all, the slab could be completely removed leaving a dirt floor while the foundation walls and columns with footings will easily maintain a stable building.

Therefore, slab cracking is often more of a cosmetic problem.  Cracks are often repaired with a variety of grout, caulk, or epoxy products primarily to prevent groundwater penetration, insect entry, or radon gas infiltration.  Cracks showing differential movement on opposing surfaces can be a tripping hazard but more importantly an indication of serious sub-surface conditions needing further investigation.

Regarding foundation walls, the most typical problem with concrete walls are vertical hairline cracks, often starting at the top of the wall and traveling down to the floor slab.  A sub-set of these types of cracks are those that propagate often in a diagonal direction from stress concentration points such as the bottom corners of basement window openings.  The key point to remember is these types of cracks, even when they penetrate the entire thickness of the wall, normally do not constitute a structural problem as the loads from above pass unobstructed on both sides of the crack to the footings below.

However, when the wall surfaces on both sides of the crack are moving out of plane or the structure above shows stress in the form of movement or cracking sheetrock walls and ceilings above, further structural evaluation is warranted.  Foundation cracks should be sealed if periodic water infiltration occurs.  Repairing cracks from the outside if often the best method, but due to the excavation costs involved, repairing the crack from the interior by injecting a crack filling material has become a routine solution.

When horizontal wall cracks; multiple closely spaced vertical cracks; or large diagonal cracks in basement corners are observed, these conditions may indicate more serious problems related to settlement or other structural problems.  Similarly, a single vertical crack that is much wider at the top of the wall may indicated foundation settlement problems stemming from poor soil conditions; hydrostatic groundwater pressures; or frost heaving.  These problems should be directed to a knowledgeable consultant.

Regarding concrete block foundation walls, most of the guidance above can be used with some exceptions.  By their nature concrete block walls are often not well reinforced and are subject to inward movement from various soil pressures causing these types of walls can bulge inward.  Ice lens forming about 3 feet below the ground surface can expand and push concrete block walls inward.  This can even occur from a vehicle’s weight being too close to the foundation, such as oil delivery truck.  When horizontal cracking is observed in block walls, steps should be taken quickly to prevent further movement.  These types of walls are also very susceptible to water penetration even when foundation drains are present often requiring serious water proofing repairs.

The key to maintaining a sound brick or concrete block foundation is periodic vigilance to ensure loose or dislocated masonry elements are not ignored.  If you observe a ‘stair step’ patten crack in the mortar joints of a masonry foundation wall, it typically means settlement has occurred under the ‘step’ section of the wall. .  Any observed bulges or horizontal movement, as well as new cracks, should be quickly addressed.

Many Missouri condominiums have been converted from old multi-family apartment buildings with mortared or un-mortared stone foundations, some with brick foundation walls above the ground surface.  These foundations have stood the test of time and are more than 100 years old and if well maintained can last another 100 years.  They are more likely to allow the entrance of ground water due to their porous nature and the necessary steps should be taken to protect the structural elements and indoor air quality of the building if high moisture is a problem.  Old foundations are like people.  As they age, they need some extra care but they have already met the test of time.

Read more

Commercial Building Inspection – PCA Due Diligence

Buyers of commercial real estate are concerned with the financing and economics of their acquisition.  Until recently, the condition of the building was only a relatively minor concern.  That is changing with PCA due diligence.

The initial impetus for carefully evaluating the condition of the building were the failures and foreclosures at the start of the decade.  Financial institutions were forced to deal with buildings that were not maintained and needed substantial work.

Next, regulations such as The Americans with Disabilities Act (ADA) created certain imperatives for building owners to upgrade facilities.  Seismic codes were, and continue to be re-written.  New environmental and ecological concerns surfaced.

Then, changes in the way buildings are financed created a need for a more formal and complete look at the condition of the building and the capital reserves required to maintain it.  As more commercial mortgages are securitized, the rating agencies on Wall Street – Moody’s, Standard & Poor’s, etc. – now require that property condition surveys be part of the due diligence process.

 

The Evolution of a Practice

The first type of engineering service to be almost universally required was the Phase I Environmental Site Assessment.  Initially, there was no standard for the service.  Vague requirements made it difficult for commercial developers, owners, and financial institutions to be confident that their environmental due diligence would be defensible in court.  Enter the American Society for Testing and Materials (ASTM) and the development of E1527: Practice for Environmental Site Assessments.

Property condition surveys and reserve studies have not yet become so standardized.  Firms in the business, each have their own format.  Each financial institution has their own scope.  FannieMae and FreddieMac individually created their own guidelines for multifamily properties.

Appropriate qualifications have not been defined.  Financial institutions require firms are acceptable to the rating companies.  The rating companies look to the financial institutions to select qualified firms.  Finding the best firm for the job can be difficult.

But things are changing, just as they did for environmental inspections.  The effort at standardization is being driven by the rating companies themselves.  Standard formats have been developed.  Most engineers in the field are aware of these formats and can provide them in a timely fashion.

Such consistency enables the engineer to understand the scope of services requested, and makes it easier for all to review the reports.  Some of the key features of the engineering study are:

  • A review of documents, interviews with owners and occupants, and a site visit
  • The development of a list of current deficiencies and a list and schedule of repair/replacement costs for building components, and a projection of these costs during the life of the mortgage plus two years.
  • Commentary on the condition of the building and any observed or recorded code violations or safety hazards.

 

What to Expect in the Future of PCA Due Diligence

With PCA Due Diligence, clear expectations for both environmental and engineering services, commercial building owners, buyers, and financial institutions can expect to see some significant changes in the way service is provided.

First, necessary services are being consolidated under one roof.  Buyers can now purchase both engineering surveys and environmental assessments from the same company.  Consolidation simplifies the process, reduces costs, and shortens the time frame in which services are provided.  Criterium Engineers has offered both services for a number of years.  Firms are looking to consolidate other services as well, such as appraisals and surveys.

The second trend is to provide broad geographic coverage.  Firms experienced in this work have tended to have only one or a very few offices.  That required that they send people all over the region or country.  The result was higher cost and lower quality since the engineer was not necessarily familiar with local conditions.  Companies that specialize in this work are now trying to build networks to cover broader geographic areas.  The Criterium network of 65 national offices – 6 in northern New England – is a perfect vehicle for providing high quality, rapid and consistent service, at an affordable rate.

 

How Can I Be Sure of Getting the Best Service?

There are a number of things that owners and buyers can do to ensure the best and most expedient service.

  1. Ask whether the engineering firm is familiar with the due diligence requirements for Commercial Mortgage Backed Securities (CMBS), Real Estate Investment Trusts (REITs) and the like.  Even if you are not going this route, the financial institution may use the standards of the rating agencies when reviewing your application.
  2. Inquire as to the qualifications of the individual doing the work; the person on site. Some firms, in trying to provide broad geographic coverage, may use poorly qualified or inexperienced individuals.  The eyes and ears of the engineer are the most valuable part of the service.  And be sure to inquire if licensed engineers or architects are being used.  There is a difference.
  3. Be sure to provide accurate and reliable information to the engineer. Construction drawings, maintenance records, and access to maintenance staff should all be readily available during the site visit.

Learn more about our PCA services.

Read more

Property Condition Assessment (PCA): How Long Will It Last?

Determining how long a building component will last before it requires repair or replacement is one of the primary Criterium-Hardy Engineers - Commercial Engineering Services, Property Condition Assessment (PCA)tasks in performing a Property Condition Assessment (PCA). Other professions rely on existing tables to render such opinions. For the engineer, the assessment is much more subjective.

The terms Useful Life (UL), Estimated Useful Life (EUL), and Remaining Useful Life (RUL) are commonly used in business. In the appraisal world, the term Useful Life is defined as the economic period during which a positive cash flow is expected for the improvements. For accountants and tax advisors, the term means the period to depreciate the asset.

Generally, the Useful Life of most assets is defined by statute. Many states publish lists of depreciable assets including personal property, land, buildings, and infrastructure. The National Association of State Comptrollers has even published a survey of Useful Life ranges by state.

There is varying specificity as well as varying values among the states. However, the practitioner, whether he or she is an accountant or appraiser, does not have much leeway in making the determination. As we will see, in engineering, the definition may not be as clear-cut.

ASTM Definitions for a PCA

ASTM E-2018-01, the Standard Guide for Property Condition Assessments (PCA), defines the terms as follows:

Expected Useful Life (EUL) – The average amount of time in years that an item, component, or system is estimated to function when installed new and assuming routine maintenance is practiced.

Remaining Useful Life (RUL) – A subjective estimate based on observations, or average estimates of similar items, components, or systems, or a combination thereof, of the number of remaining years that an item, component or system is estimated to be able to function in accordance with its intended purpose before warranting replacement. Such period of time is affected by the initial quality of an item, component or system, the quality of initial installation, the quality and amount of preventive maintenance exercised, climatic conditions, extent of use, etc.

These values are used to calculate estimated capital expenditures and reserve requirements for properties while performing a PCA.

Engineering References

Engineers may use certain published guidelines as a place to start when determining the EUL. The American Society of Heating, Refrigeration, and Air-conditioning Engineers(ASHRAE) has long published a listing of the life expectancy for most HVAC components. Examples of the more common components are as follows:

Thru-wall AC 15 Condensers 20 Centrifugal chillers 23
Rooftop air conditioners 15 Cooling towers 20 Furnaces 18
Diffusers, grilles, registers 27 Compressors 20 Electronic controls 15
DX coils 20 Reciprocating chillers 20 Heat exchangers 24

In the 1990s, Fannie Mae, in its Guidance to the Property Evaluator, published a more comprehensive reference list of building “items, components, or systems.” These are primarily for residential applications, however. Marshall & Swift provides similar values for commercial applications, subdivided by the quality of the component. Selected examples of the Fannie Mae data are offered below.

Asphalt roadways (seal) 5 Brick or block walls 40 Elevator cabs 15
Asphalt roadways (repave) 25 Vinyl siding 10 Buzzers/intercoms 10
Chain link fencing 40 Asphalt shingle roofs 20 Water heaters 12
Concrete retaining walls 20 Membrane roofs 20 Ranges 15
Emergency generators 15 Windows 20 Refrigerators 10
Wood decks 20 Ceramic tile floors 20 Tennis courts 15
Exterior doors (alum. glass) 30 Elevator machinery 30 Pool mech. equipment 10

The key point is that these are only reference points. They do not account for all the variables listed in the ASTM standard. Therefore, the judgment of the engineer is a critical part of the process. The engineer evaluates how these components are actually used and adjusts the Remaining Useful Life based on that evaluation. The difference can be dramatic and may have a significant effect on the viability of the financing or acquisition.

Cost Segregation Studies a Hybrid Application

In recent years, the line between engineering and accounting and appraisal has blurred slightly by the addition of several new services. Cost Segregation Studies seek to “segregate” the costs attributed to the non-permanent building systems from the building itself so that they can be placed on a more aggressive depreciation schedule. In doing so, the owner is able to recover more cash in the early stages of building ownership that can best be put to use elsewhere. This process combines the estimating skills of the engineer with the tax skills of the accountant. Building components are placed in different categories (5-year, 7-year, 15-year) for depreciation purposes. There is little room for interpretation here but the IRS requires engineering expertise to accurately reflect cost.

Building Life Even More Subjective

Recently, we have been asked to provide estimates of the Remaining Useful Life of whole buildings. This need is most often occasioned by the net lease marketplace wherein, as a condition of the lease, the lessor seeks to ensure that the building will last longer than the term of the lease. Marshall & Swift publishes a guide, used mostly by appraisers, that provides estimates of building useful life based on building type and quality. According to the guide, few buildings have a Useful Life greater than 50 years although we all know of buildings that are 100, 200 or older. The engineer, in this case, must determine if and why the Useful Life would be longer than the published data. He uses current condition, use, and maintenance operations to make that determination. An important point, however, is that this determination is not an economic one. Buildings may be put to different uses over their lifetimes, and the current use may not be the most economical or appropriate use in the future.

What’s the Answer?

So how long will it last? The answer is: it depends. The experience and judgment of the engineer are critical factors in coming up with a reasonable answer to this very important question.

The Engineering Advisor is intended to enhance your knowledge of technical issues relating to buildings.  For additional information on any subject, please feel free to call us.  Our commitment is to provide you with timely, accurate information.

You can learn more about our Property Condition Assessment (PCA) services.

Read more