Q&A with Mike Kosmoski: Ins and Outs of Property Condition Assessments

In a webinar hosted by LCS in November of 2022, Mike Kosmoski, our VP of Construction Services answered some great questions about Property Assessment Reports. 

This information is valuable for lenders working to mitigate risk by identifying issues that will affect the value of the collateral now and in the future.

While some items or systems may currently be in serviceable condition, all construction materials have an effective usable life. As such, these items may need to be replaced and should be identified prior to lending out a piece of collateral. 

Read on to learn from our experts before your next PCA report.

Question 1: How do you determine what remedy you suggest for pavement issues and the timeframe in which that remedy should occur? 

From the second you install pavement, you already know you’re going to need to do some maintenance on the surface. After a review of the current condition of the pavement, if we feel the existing situation is a safety concern, we will recommend immediate repair or replacement. If the conditions are that the lines have simply faded or the sealant is mildly worn, we would suggest a reseal or restripe in the short term. Then, we would recommend applying these same remedies once additionally during the term of the reserve. 

Question 2: Is there particular consideration given to brick buildings? I have heard that brick needs to breathe and if it’s painted over, it will eventually turn to mush – as well as other issues with brick specifically. 

Brick facades conventionally have an air gap between themselves and the main structure. As such, it is acceptable to paint masonry facades as long as they are prepared properly and painted using the proper materials, with the right steps, and in the right temperatures. Painting the facade can actually protect the brick from outside weather conditions and prolong its lifespan. It is also important to consider the flashing at the base of the structure and ensure that if water gets behind the brick it seeps out of the bottom and dries.

Question 3: Have you seen any examples of concrete spalling as was noted in the condo collapse in Florida? 

The short answer is: yes. In a situation such as that, LCS would identify the apparent structural issue and recommend that a licensed structural engineer perform an assessment of the structure. 

Question 4: Would it be possible to include clarifying language explaining that the long-term reserve is actually for years 3-12 in the actual report? 

Yes. Any newly ordered PCA’s will include language to clarify the reserve terms.

Question 5: In what situation do you see lenders requesting a PCA from you, and are there any products similar to a PCA for a lower-value loan?

Generally, we see a request based on two different metrics: age, and value. 

While it varies by lender, LCS sees PCA requests for buildings over $500,000 in value and/or over 3 years of age. It is generally not necessary for lenders to request a PCA on properties less than 1-year-old which are assumed to be without major issues.

For buildings under those thresholds – such as a small house or other modest build-out –  we see the use of a PIR (property inspection report) to confirm the condition of the collateral before lending takes place. Rather than a 12-year reserve and looking at 23 building systems, we’ll look at about five or six building systems for a 5-year term. This report can be upgraded to include costing as well.

Question 6: Do you see lenders typically escrow funds for issues identified in your reports? If so, how much? 

Holdbacks vary lender by lender but LCS usually sees some amount being reserved based on our recommendations. I would say the industry standard is 100% of the first five-year recommendation, but we have seen it as low as 50% or as high as 200%. 

Question 7: Can you elaborate more about how to calculate what year of the reserve term a recommendation is included in? 

I know this can be confusing but, simply put, year 1 of the reserve is called the immediate term, which is the first 12 months of recommendations. Year 2 of the reserve is called the short-term, and years 3-12 of the reserve are actually years 1-10 of the long-term reserve. 

Mike Kosmoski and the team at LCS are here to help you Lend Confidently.

If you have more questions about PCA reports, building materials considerations, escrow and reserve terms, or any other topics related to lending for construction projects, we hope you will get in touch. Our experienced and dedicated team at LCS can help you navigate the assessment process and make sense of the findings contained within. 

For the full recording and slides from this webinar, reach out to Liz Mahoney, Director of Sales & Business Development today.