class 6: stages 4 and 5 Flashcards
the role change of the developer in stages 4 and 5 from stages 1, 2 and 3
In Stages 4 and 5 the developer changes his primary role from creator/promoter to negotiator
importance of Contracts
the usual method of allocating and controlling both responsibility and risk
They set forth the rules for the physical, financial, marketing, and operating activities that occur during construction, formal opening, and operation
The agreements should make the costs and responsibilities explicit and as free of ambiguities as possible.
all parties involved in contract negotiations
developer
Landowner
Architects
Contractors
Users
Lenders
Investors
The four phases of negotiations
- Planning and Preparation
- Opening and Exploration
- Proposing and building
- Bargaining and Settlement
- Planning and Preparation
Be clear about objectives
What is the most I can realistically hope to achieve?
What is the least I absolutely need to have?
Recognize the importance of information
Assess the situation/power
Plan a strategy
common mistakes to avoid in planning and preparation
Inadequate preparation
Being unrealistic when deciding on range of acceptable outcomes
Not prioritizing
Phase 2 – Opening and Exploration
Create the right atmosphere
Establish a rapport
Uncover the real issues and interests
Outline your needs
Establish common ground to build relationships
common mistakes to avoid in opening and exploration
Inadequate preparation
Interrupting
Talking too much /not listening enough
Point scoring/attacking/arguing to “win”
Not summarizing
Impatience/loss of temper
Modifying priorities or plans in reaction to the other side’s impatience/ temper/emotions
Phase 3 – Proposing and Building
Listen carefully to the other party
Present proposals
Leave room in your proposals to manoeuvre
Give tentative signals of movement
Make conditional or hypothetical proposals
Build on the common ground
Use concessions to overcome obstacles
Probe attitudes: “What would you be feelings if…?”
Find the right balance between competition and cooperation
Summarize and confirm provisional agreement
common Mistakes to Avoid in Proposing and Building
Complaining but not proposing
Opening with an unrealistic condition or offer
Behaving inconsistently in moving your position
Interrupting a proposal
Smothering a proposal in verbiage
Phase 4 - Bargaining and Settlement
Decide what you require in exchange for your offer
Keep all the issues linked, and trade off a move on one issue for a new condition or a move on something else
Record what has been agreed upon
Common Mistakes to Avoid in Bargaining and Settlement
Agreeing to issues one at a time, but not linking movement on one issue to movement on another
Not confirming/summarizing what has been agreed
Not ending the bargaining once agreement has been reached
Bluffing with a “final offer”
Making inappropriate threats
what should be included in the purchase agreement with the landowner?
Price
Deposits to be paid
Conditions of closing and responsibilities of both parties (eg. Who pays broker?)
Due diligence rights (e.g. right to go onto the site to take soil samples)
Escape clauses for deal breakers uncovered during due diligence
Negotiations with Lenders
Developers often negotiate both the construction loan and the permanent loan at the fourth stage
when can negotiating a permanent loan may be deferred to a later date
if it is not a condition for the construction loan
risk-taking difference between Construction lenders and long-term lenders
Construction lenders take on execution risk, whereas long-term lenders are more exposed to market risk.
. It is not unusual for several lenders to collectively provide construction or mortgage financing.
why?
A single lender may not want to assume the risk inherent in a large project
Items to negotiate in the mortgage loan
Loan amount
Rate or spread, and rate structure
Term
Amortization period
Recourse and guarantees
Wide variety of clauses regarding default, representation and warranties, etc.
Interest rates on construction loans are usually variable rates based on what?
based on Prime or the Banker’s Acceptance Rate
–> BA rates are a function of the credit quality of the Bank
a floor rate
During periods of low interest rates, lenders often require a minimum interest rate called a floor rate
what do developer and construction lender typically agree on?
on a line-item budget for the project with draws advanced against that budget
why do many developers not permit draws against a particular line item
if, in the opinion of the lender, the draws will leave insufficient funds in the line item to complete that portion of the project.
when do construction lenders advance funds
Lender advances funds to pay for the construction costs as they are incurred
At the end of each month, what happens to the construction loan interest?
not paid by the borrower but added to the outstanding principal balance.
till when can construction loans extend to?
can extend to the period it takes to lease-up a property and stabilize its cash flows
how are construction loans generally repaid from?
Construction loans are generally repaid from the proceeds of sale of the property or from the proceeds of a term loan
what are Mezzanine loans used for?
used as an additional source of funding
describe mezzanine loans
Subordinate to the first lender
Higher rate
Lower equity requirement
Repaid by permanent loan OR share of profit OR cash flow OR ownership interest
Less secure
third in the capital stack
describe the capital stack
- secured debt (mortgage)
- wrap-around (2nd mortgage)
- Mezzanine debt (high LTV)
- Unsecured debt
- Preferred equity
- Common equity
Negotiations with architects must attain agreement on what?
Compensation
Schedule
Scope of work
Ownership of the plans
why does the developer enters into a construction contract with a construction company?
to build the structure and related infrastructure according to the plans
relationship between dev., general contractor, and subcontractors
Typically, the developer and the general contractor sign one contract, and the general contractor and the subcontractors sign another set of contracts
what do contracts with contractors indluce?
Fee
Schedule
Scope
Holdbacks
Change order management
Contract Types with Contracts
Fixed Price (Lump Sum) Contract
Guaranteed Maximum Price Contract
Cost Plus (Time and Materials) Contract
Guaranteed Maximum Price Contract
Any savings go to the developer
Cost Plus (Time and Materials) Contract
Typically used when construction costs are difficult to determine in advance
Developer pays the costs plus a predetermined profit margin to the construction company
which type of contracts with contractors protect the dev?
Fixed Priced and Guaranteed Maximum Price contracts
which type of contracts with contractors protect the construction company?
Cost Plus contracts
a bond
a guarantee of completion or payment
The contractor or developer would purchase a bond from whom?
a surety or insurance company (like Intact Insurance, for example)
what happens, after the purchase of a bond, if the contractor or developer fails to complete the contract?
the surety company would either:
Complete the contract involving the original contractor by providing any required financial, management or technical support
Re-tender to a new low bid and pay for the cost of completion in excess of the contract price
Pay the bond penalty
bid bonds
guarantee that if a firm wins the bid then they will actually complete the work
Several of the contracts negotiated during stage four are contingent on other contracts
what are the complications with this?
Many of the parties examine contracts in which they are not direct participants
Timing of the execution of contracts can be difficult and may require lawyers to hold documents in escrow
Developer shifts to management role
Purchase insurance
Put in place accounting and HR systems and procedures
Ensure supervision of construction and coordination across activities
