Peter Korda and Evangeline Chan Published in Commercial Investment Real Estate "Construction Plans: Structure your project documents to mitigate risk before approaching lenders"
03/13/2007
The article "Construction Plans: Structure your project documents to mitigate risk before approaching lenders" in the March/April issue of Commercial Investment Real Estate by Peter and Evangeline notes "Sponsors and owners considering financing the construction of commercial real estate projects need to know how lenders evaluate a project’s overall risk. Such understanding increases the likelihood that a developer’s application for financing will be approved. Lenders view construction loans as inherently riskier than conventional commercial real estate loans. While conventional loans are supported by cash flow-generating real property, construction loans generally are secured by unfinished collateral and speculation as to the completed project’s economic viability. Managing basic construction risks from both the lender’s and sponsor’s perspective begins as early as the project’s planning phase. To mitigate some of the general construction risks, lenders may require certain terms and provisions be incorporated into the construction documentation and may also include corresponding terms and provisions in the loan documentation." The authors point out that Scheduling Delays, Cost Overruns and Liens or Incomplete Projects are common concerns that must be addressed. They note "Lenders mitigate many of the foregoing risks through careful negotiation of the construction documents. The following list covers some standard and not-so-standard terms of construction contracts, their significance, and how such terms can increase or mitigate risk." Among those are Contract Time, Assignability and Ownership of Plans, Dispute Resolution, Subsurface Conditions, Architect Responsibility and Guaranty of Contractors. "Certain terms found in a construction contract illustrates how these terms distribute the common risks associated with commercial construction projects. It is important to recognize that many such risks, through careful negotiation of the construction and loan documents, can be addressed and thus mitigated."
