Why financial institutions require an independent third party to report on the costs and associated risks of your development project.
Long gone are the days of bank managers making judgement calls on whether to approve or continue to fund a development project. Nowadays in a moderating property market, with rising construction costs and tougher lending conditions, financial institutions are putting stricter requirements on developers to provide independent advice on project risks and development finances. With many property developers unaware of these requirements, this is where the role of a Quantity Surveyor as a specialist property consultant is critical.
From an initial pre-lending appraisal right through to the completion of a project, their expert knowledge in construction cost and risk management can advise both parties when and where they need to take action.
Let’s demystify what’s involved and discuss some of the reporting requirements.
What does the bank reporting process involve?
When a financial institution enters into a commitment to provide financing for a development project, a Quantity Surveyor with expertise in construction and development is generally appointed by the bank as a ‘Bank Monitor’ to provide technical advice on development finances and project risk. A developer will begin to receive revenue from a development on successful completion of the project and the developer will begin to repay the loan at this point. Accordingly, a bank will rely on the Bank Monitor to identify any issues or potential problems in relation to the project, as these may represent a risk to the repayment of the loan to the bank.
Typically, a Bank Monitor will advise on:
- Development costs (including construction costs as the major project cost)
- Completion date being advised by the developer
- Status of statutory approvals
- Design and construction quality and
- Competency of the developer, builder and the project consultants
A Bank Monitor’s advice in relation to the above is generally delivered by way of:
- An Initial Report, whereby an audit of the project is carried out prior to execution of the loan; and
- Progress Reports whereby the ongoing progress of the works is monitored, with a view to identifying any potential issues affecting successful completion of the works. Approval of periodic (generally monthly) drawdown requests from the developer are also assessed as part of these Progress Reports.
From Initial Report through to ongoing Progress Monitoring and Reporting, the role of Bank Monitor is crucial in identifying any gaps in a project that may lead to potential increases in cost, time delays or variations.
Bank reporting exists to protect the interests of both the financial institution and the property developer. The process itself can be relatively straightforward if all parties are aware of what information is required and when. This is where your Quantity Surveyor’s experience and foresight will facilitate a smooth process.
In the end, understanding and identifying risk will allow timely decisions to be made for the benefit of all parties and a successful outcome to the project itself.