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CRE Finance World, Autumn 2012

Recent Developments in Construction Lending Risk Mitigation: Expose the Myths to Reduce the Risks Myth #6: Once a project falls severely behind schedule, there is Conclusion nothing the lender can do to get it back on schedule. With an understanding of the management relationships, roles and contract methods on a modern construction project, and the Reality: When a project falls behind schedule, owners are often strategic use of construction advisors, commercial construction unwilling to accelerate work because they don’t want to spend the lenders can improve their loan documentation and reduce their additional money. Work is usually accelerated by hiring additional construction risk. crews, increasing work shifts, expediting manufacturing, and similar tools. As the first signs of delay appear, these corrective actions 1 U.S. Bank Loan Delinquencies — 4Q 2011 Early Estimates, Trepp, LLC, are available as long as someone is willing to pay for them. As January 30, 2012 delays increase, however, corrective actions become less viable. 2 For example, the AIA A121 Agreement Between Owner and Construction Options: A lender has some options to induce their borrower to Manager where the Construction Manager is also the Constructor or the spend more money to bring a project back in schedule. As construction AIA A133 Standard Form of Agreement Between Owner and Construction timing is ultimately a function of money, the construction lender’s Manager as Constructor most effective influence over timing is through the loan balancing provisions of its agreement. If the completion date in the loan agreement is in jeopardy, then the loan may be out of balance because it will take additional money to accelerate the work to meet the schedule. A lender may require a schedule acceleration plan from its borrower and/or the contractor, with a corresponding estimate of the costs associated with this acceleration. This estimate ING Investment Management would then be the basis of either a loan rebalancing obligation, or a budget adjustment from contingency or cost savings elsewhere. Real Estate Finance – Atlanta Full Service Real Estate Manager Secondly, a lender may consider processing loan draws quicker or advancing loan proceeds on a more frequent basis (such as  Balance Sheet Origination bi-weekly), as another method of inducing faster work. Many  CMBS Origination subcontractors will shift more of their staff and resources to a project that pays quicker because it requires less overhead – and  A/B Structures greater profit — than their other jobs.  Fitch Rated - Commercial Primary Servicer CPS3+ - Commercial Special Servicer CSS3+ Contacts Jason Tessler- Head of Production 770-690-6707 Mike Cale East Coast 770-690-4788 John Foley Midwest 770-690-4805 Dan Siegenthaler West Coast 770-690-4652 INVESTMENT MANAGEMENT WWW.INGINVESTMENT.COM A publication of Autumn issue 2012 sponsored by CRE Finance World Autumn 2012 43


CRE Finance World, Autumn 2012
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