Due Diligence Flashcards
What are the key areas of risk to funders?
- Cost increases (reduce headroom / borrower profit)
- Programme increase (finances cost increase, loss of opportunity to redeploy capital)
- Drop in GDV – market downturn,
- Design / quality issues impacting on refinance (sale/let ability)
- Statutory compliance - Planning, Building Control (delays to refinancing)
What are security that a lender would typically require?
- First charge over the site
- Undertaking from the Borrower’s Solicitors to deal with the distribution of sales proceeds
- Cost overrun guarantee
- Co-Insured (could be an issue if Lender steps in following borrower insolvency and insurance only due to borrower)
- Step In rights (lender able to take control of development with control of MC)
- Subordination deed (ensures lender is paid before other parties)
- Assignment right for CW’s, Insurances, Contract
What is headroom?
The balance between lending and the GDV
(Borrower profit)
How do you assess the sufficiency of construction costs?
- Using benchmarking data to identify that the costs were in align (ideally over) comparable projects
- Heyford; multiple phases so use of previous phase data adjusted to current date
Sufficiency and type of risk allowances?
- 5% minimum construction risk allowance -greenfield. 10% if refurb (Newbridge)
- DD Dependent on RIBA STage; 20 15 10 5
- Employer Change - 2%
- Employer other - Not used but 1% if including
How would you assess the suitability of a construction programme? I am aware of the limitations of this approach.
- BCIS Contract Sum & type of work & area
- Range expected by comparison of similar project
- High level indication
- Best to identify similar project and establish key differences
- i.e. separate abnormal elements of work to establish if programme is achievable or very optimistic
How might you advise a lender if a project programme was very short?
- If a programme was deemed to be insufficient I would flag this as a risk to a lender as they should consider that the borrower will have to incur higher financing costs and the lender will not be able to retrieve their funds for a longer period of time
What is the planning approval process and why does it impact development?
- Pre-Commencement – Detailed drawings to be approved, ecological protection, contamination testing
- Pre-Occupation – Building regulations sign off
- Compliance – Site working hours, noise levels
What is building control and why does it impact development?
A Building Control officer must be assigned to inspect the construction of the works to ensure it complies from critical structural and fire safety perspectives
Why might building regulations be an issue to the lender?
Failure to comply could result in significant delays if works have to cease or sign off cannot be given to facilitate the funding exit by sale/letting.
What are the typical insurance requirements on a project?
- Contractor All Risk - unforeseen loss or damage to building works, machinery movement, advanced business interruption
- Professional Indemnity – provide cover for claims which arise out of the conduct of professional business.
- Employer’s liability insurance - help pay compensation if an employee is injured or becomes ill because of the work they do for the employer.
- Public liability - Cover against claims by public visiting the site or adjacent to the site or independent sub contractors
I am aware of the importance of ensuring that Interim Payments are accurate and are in accordance with the contract.
- Fair payments should be made to the MC in line with progress of site works to enable cashflow
- HGCRA legislation enables MC to terminate if Client does not pay on time
- 14 day notice of default - Employer has this time to remedy issue i.e. pay contractor, failure to do so enables contractor to:
- 21 day notice of termination
Heyford
A key aspect of the Initial Report was to assure the Lender that the borrower had adequately budgeted for the costs on the scheme.
- BCIS Construction Inflation indices; 7% Inflation Allowance (Start to Con mid point - 15 month programme)
- Benchmarked construction costs against previous phases
- The development budget only included a 2% construction risk allowance.
- Due to the nature of the procurement route and the volatility of material price I recommended that risk allowance was increased.
- I further recommended that the lender seek a cost overrun guarantee from the borrower.
I also reviewed the recommendations of the ground investigation report and whether the foundation design aligned with this. I recommended that a Letter of Reliance was provided from the ground investigation report to protect the Lender.
- Recommendation confirmed that only strip foundations were required
- Letter of reliance provides third parties (the lender in this instance) with reliance on the contents of the report for example in the worst case scenario where the borrower became insolvent.
- If the report was deemed to provide inaccurate recommendations i.e. Piling required then the lender could take legal action for any additional costs associated with the additional works. Would need to establish that the consultant had acted negligently
In the Initial Report I also confirmed the suitability of the chosen procurement route in relation to the borrower and the proposed works.
- Client enters into contract with trade contractors directly so retains control (also risk) of the project.
- CM prepares:
- Programme
- Site setup
- Tender the trade packages (ongoing relationships = multiple phases) e.g. Achieve good value on basis of ongoing relationship avoiding re-tendering costs etc
- Co-ordinate the works
