The PCA or Property Condition Assessment is a report LOGAN offers in Colombia, Peru, Mexico, and Costa Rica, among other countries. The report analyzes the physical status of a property, then determines what will be needed to be done to bring the property to a ‘standard’ or acceptable condition. A detailed projection of what needs to be repaired is created, and detailed in a financial projection, which also concludes the funds which will be needed to be saved as a capital expenditure line item. In Latin America, especially with older assets, there is major variation in how real estate is maintained, and thereby condition when such properties are sold.
Not undertaking a Property Condition Assessment when acquiring a property can lead to the following errors:
- Buying a property for too much – that is in a substandard condition
- Not modeling the future cost of future repairs properly – and paying too much for an asset
- Not negotiating based on the condition of a property – few owners maintain properties perfectly, especially in LATAM
- Only studying the structure of a property (structural engineering study) – this study may define if the building structure is in good condition but does not take into account much else. There are many other components that are important in a building -and their condition is important to potential renters and thereby the profitability of the property
- Negotiation – the PCA is typically ordered while the buyer is under contract on a property. This report is an important tool in being able to inform the seller of deficiencies that should be remedied prior to close. The alternative would be to inspect the property on one’s own, however, often buyers do not have this expertise – nor does the buyer always respect the opinion of the buyer. A 3rd party PCA is done by someone with experience and carries more weight because it is an objective opinion of a professional third party.
- Financial Modeling – Projections often are very general when modeling a new acquisition. Often analysts just project based on a percentage of the gross income the property produces. This may work for new properties – because everything is new. When the property is older, however, it becomes very unclear what the remaining usable life of the components of the property are or its funcionality.
For example, if the major components of the property being purchased, such as the roof need to be replaced in the short term, the capex projection of the acquisition could be considered low. The PCA closely details what will need to be replaced, so there are no surprises. This allows the acquisition team to negotiate with more confidence and precision.
The standard guide to performing a PCA is the ASTM E2018 – which is followed by LOGAN in writing these reports. Below are they typical steps taken during the execution of the PCA:
– Interviews and Document Review
– Walk-Through Inspection or Survey of the building. This is the survey of the property and there are ten major elements which the inspector focuses on:
- Building Site or Land Area
- Frame, Structure, & Building Envelope
- Roof and Roof Structure
- Air Conditioning & Ventilation
- Elevators & Escalators
- Life Safety / Fire Protection
- Additional Considerations: Determining NFPA hazard classifications Seismic considerations, FHA Requirements, Insect / Rodent Infestation, Mold, ADA Accessibility
- Development of Cost Estimate to Make Repairs – or Remedy Inadequacies
- Write the Property Condition Assessment (PCA)
Time to Complete
The report usually takes 3-4 weeks to complete from the signing of a professional services contract and delivery of the basic information to proceed forward.
The PCA report quality is a result of the experience and understanding of the inspector who writes the report and inspects the property. Experience working in the product type, knowledge and understanding of the particular market in Latin America and professional certification are important. At LOGAN, the singer of the PCA report is always a registered architect or engineer.