CONSTRUCTION MANAGEMENT: Foster Returns with Due Diligence

As we all know, the favorable cost of capital in today’s environment has investors pursuing real estate investments to provide diversification and to optimize the risk-adjusted performance of their portfolios. Fund management platforms and direct investors are interested in our sector as they look to reduce volatility and manage downside risk in investor portfolios.

Additionally from the capital side - strong demand and favorable fundamentals have pushed banks, life companies and private lenders toward construction deals. We as an industry have experienced an overall increase in leverage for all property types, and non-recourse options are readily accessible. With the flow of capital available for new development and the capital raising volume that needs deployment, the need for owner and capital representation in construction management capacities is more important than ever.

• Lending for construction and development is growing faster than lending for completed buildings.

• The balance of construction loans held by banks has grown by nearly 15% since last year.

• Demand is so strong that speculative construction of new or repositioned development projects—which are less tempered by an inability to get financing today—is booming. In Dallas, for example, more development is under construction than at any time since the commercial building boom of the 1980's, according to The Dallas Morning News. The asset-classes have evolved, but the appetite and job market of North Texas is empirically indisputable.

• For construction loans, the default rate was 1.8% in the first quarter, the lowest level since Q2 2007 and just a fraction of the 16.8% peak of the recession. Lenders have largely cleared the bulk of legacy construction loans from their balance sheets that encompass sub-par fundamentals.

Efficiency and a cost-effective construction focus that mitigates risk for all stakeholders has been a constant drumbeat in the construction industry, raising costs and adding risk and waste across project life cycles. Efforts to improve efficiency, however, have proven difficult in a market too often defined by low margins, aggressive procurement, talent shortages and uncertain work pipelines. Improving productivity and marginalizing risk(s) for capital sources demands a prescription of collaboration that supports a culture of shared risks and rewards.

We represent institutional capital sources, private equity, lenders and developers in connection with supporting underwriting efforts from a construction perspective and executing the purchase and development of real estate assets throughout the country. Our Construction Management practice has a plethora of experience in identifying risk and fostering value on behalf of our clients. Whether we represent the debt, mezzanine component or equity within the capital stack; or providing the on-site coordination on behalf of the Sponsor; we approach every construction project with a laser-focus on our client’s greatest needs. 

Construction activity is carefully vetted in advance, with a large majority of our clients reporting the use of financial and risk analysis to screen projects. We assist our owners and capital sources in executing and prioritizing potential projects using pre-established criteria such as operational safety, environmental, legal and regulatory factors, and overall return on investment.

Our experience and expertise allow us to assist our clients in closing transactions in the most efficient manner and in a way that both protects our clients' interests and meets their goals. We have substantial experience with all major property types including office, retail, hotel and resort properties; residential developments (including apartments and condominiums); and industrial buildings and parks.

Construction Management Administration can mean different services to different organizations. Whatever your needs are, we can always tailor our services to fit your specific project needs. We will represent you and your organization in any capacity either at the building site, with the local municipality, in the office or at the Boardroom. Our professionals attend and represent our clients at weekly or monthly Project Development Meetings (PDM) as requested during the pre-construction, construction and post-construction period in which we promptly provide documented written summary reports of meetings that identify significant issues or pending decisions.

Prior to the commencement of construction, our Construction Document Review (CDR) involves the evaluation of all the documents (plans, specifications, geotechnical reports, budgets, schedules, contracts, etc.) necessary to execute a successful “on time” project. Our evaluation considers the quality of the proposed improvements including the site amenities, parking, structure, building envelope (walls, roof, windows and doors), finishes, life safety, mechanical / electrical systems and other relevant building components. The review would also consider regulatory, public safety and fire protection requirements, as well as project compliance with the Americans with Disabilities Act of 1990 (ADA).  The process would include suggestions for quality upgrades that will create increased value, reduce maintenance costs, and produce operating economies. 

The Monthly Project Review (MPR) involves monthly site visits for the purpose of observing the construction of the development’s improvements to determine the progress of construction, comment on compliance with Contract Documents and conformance with the Project Schedule.  The MPR will also include a review of the monthly Pay Application, Lien Waivers, Change Orders and the Project Construction Budget.  The MPR will be summarized in a monthly report with details of ongoing sub-contractor performance, project schedule conformity, budget conformity and progress photographs.

As requested by our clients, additional site visits may be required periodically to observe the status of construction without a review of the payment application.  This inspection, the Periodic Project Review (PPR), will include those necessary visits made at critical points during the construction process.

 At the end of construction, the Final Closeout Report (FCR) includes all of the services in the MPR as listed above, as may be appropriate for the last MPR.  In addition, this report will include a review of final Certificates-of-Occupancy (C.O.’s), and letters from design professionals certifying substantial completion and or compliance.  We will review and participate in the preparation of final “punch lists” for subcontractors and report on compliance and substantial completion. We will monitor assemblage of “as-built” drawings, shop drawings, product data sheets, Operating and Maintenance Manuals, and all guaranties and warranties for use by on-site management.