By Alex Elkin
It’s been a week since construction on non-essential projects began again in New York City under Phase I of the state’s reopening plan.
Not surprisingly, the industry has breathed a collective sigh of relief, eager to be building again after a nearly three-month pause that sidelined projects and put employees out of work.
This does not mean that it will be an easy task to get overdue and over-budget projects to the finish line.
While the Department of Buildings has released clear guidelines for a safe reopening – which has been met with overwhelming compliance – there are many questions that remain unanswered and many issues that developers need to address head-on to complete projects in the current environment. Here are five things every developer should be doing right now:
- Call your lawyer. There is a reason you spent a fortune on the closings. Your loan docs and operating agreements (debt and equity) clearly detail rights and remedies for most scenarios. While the last three months were unprecedented, knowing which scenarios were contemplated in your agreements – and the relevance to current conditions – is the first step in formulating a viable plan to advancing a project with minimal damage. (And it also plays an important role in the next item.)
2. Call your lenders. There is a tremendous amount of anxiety regarding how the last three months of debt service can, and will, be treated. The majority of lenders that we represent, and other lenders we’ve spoken with, are dealing with loans on a case-by-case basis. Projects that were in good standing will likely find lenders more receptive to reasonable accommodations, but it’s not all bad news for the smaller developers, or those projects that were showing signs of struggle. Foreclosing on a loan is generally, though not always, a last resort for a lender. This is certainly true for institutional debt, but also for mezzanine financing. Most lenders are in the business of lending, not developing or managing properties, and would typically prefer to continue working with borrowers to simply complete projects as quickly as possible. The path of least resistance may be ugly, but the goal is generally to get the debt off the balance sheet. Lenders often have more flexibility than we think they do.
3. Call your insurance broker. There is little industry-consensus on how COVID-19 claims will be processed long-term. Virtually all claims already submitted under Builders Risk policies have been rejected, but those will be litigated and the force majeure clauses will be argued ad nauseum. But knowing your policies, your exclusions, and your carrier will go a long way toward understanding your options for filing a successful claim.
4. Improve your project schedules. Every project has been impacted by COVID delays (even so-called “essential” sites experienced less efficiency and lost time during the crisis) so there is an even greater emphasis on getting projects completed as quickly as possible. There are a number of effective tools at a developer’s disposal to accomplish this – incentivizing (sub)contractors, value-engineering with a focus on labor-saving installation, and sourcing more readily-available alternatives to specified equipment are just a few of those available tools.
5. Reduce your remaining costs. Many of the approaches listed to improve schedules apply to costs as well — incentivizing trades, value-engineering with a focus on cost-savings, and sourcing alternate manufacturers with more competitive pricing. But for costs, developers have the added ability to re-price any work that has not yet been completed. Many smaller contractors – and even larger contractors who did not have the financial stability to withstand the COVID issues – are perilously close to going out of business. The laws of supply and demand kick in here and dictate that the pricing between subcontractors is more competitive than ever. Eastbound Construction has been retained by a number of clients to perform re-pricing exercises and has found a blended average of eight to ten percent savings on trades that were re-bid in anticipation of Phase I. The savings thus far appear to be spread over the three main cost categories – labor, material, and equipment – but primarily on the labor side. The key takeaway is that everything should be on the table for discussion and these kinds of discussions are more than likely to yield positive results.
Alex Elkin is a principal at Eastbound Construction