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By Altus Group | 4 April, 2020

Property developers and investors need to prepare for an increased level of reporting to lenders. Now more than ever, lenders have a close eye on development finances and project risk during the COVID-19 pandemic. The ability of owners and developers to continue building and to complete projects on time and on budget is increasingly at risk.

Most financing agreements include obligations with which borrowers must comply.

You need to consider whether any of these obligations are triggered by the impact of the COVID-19 outbreak on your project. At the same time, lenders have the right to request information and you must respond to such requests in a timely manner.

You are likely to see project economics decline during this period of pandemic disruption, including:

  • Pressure on cash flow requirements, such as increased loans or lines of credit
  • Greater probability of defaults and closing risks, such as residential and commercial leases
  • Delayed or deferred loan paydowns and reduced security

Be aware of any required notifications to financial stakeholders under information covenants in finance documents. In some cases, a loan monitoring report from a quantity surveyor may be helpful to clarify a project’s cost-to-complete, and potential risks and pitfalls.

Please find below some key items and considerations when it comes to loan monitoring during these uncertain times.

Risk assessment

Lenders will require a thorough risk assessment detailing potential risks and impacts. If the project is at risk, which elements and at what dates could this become critical. This might include supply chain delays, site closures, quarantined sites and the impact of social distancing measures. Ask yourself: Will changes in local legislation affect the current contract position? What are the key risks? What are the potential impacts? And how can you best mitigate these risks?

Cost-to-complete

A cost-to-complete will review the remaining works to be completed on site and confirm the costs associated with these works. The economic impacts driven by COVID-19 could potentially impact the ability of owners and developers to continue building and to complete projects on time and on budget. The replacement cost of a contractor can be quite expensive. You’re not only dealing with that contractor’s trade cost-to-complete but also need to allow for any applied cost risk from another contractor to complete the project. For example, premiums to warrant remaining works, monies paid but not recoverable which include payments to sub-contractors, legal costs for providing securities and bonding, escalation costs and additional financing costs due to delays. Gather and consolidate the necessary information, including records that could be required to defend unsubstantiated costs and to gain clarity on the timing and costs likely to be incurred.

Stakeholder communication

Identify key stakeholders and consider what information you need to share with them and how you will communicate. Proactive communication and engagement with all project stakeholders is critical now more than ever. Lenders will be looking for insight into how the builders and developers are working together. For example, are they acting collaboratively during this period or taking a purely contractual stance? Having a complete understanding of the contractual position of a project is also important, for example head contractor and sub-contractor entitlements in relation to delay and/or variations.

We are here to help and ready to provide practical advice to help navigate your construction projects through uncertain times. We will continue to update this page as the situation evolves.

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