Whenever money is borrowed, or lent, for a construction project, all parties are responsible for clearly communicating how the funds will be utilized and when the project will be finished. On the surface, keeping all parties in the know seems relatively simple, but if you ask any Miami construction litigation attorney, they’ll tell you the same thing: financing construction projects is far from simple.
Institutional arrangements aimed at financing construction projects differ depending on the project in question and the type of owner looking to have the project completed. Our Miami construction litigation attorneys introduced this topic in parts one and two. Now, we will discuss some of the risks associated with these types of financial arrangements before wrapping up in part four.
Risks and Uncertainties
There is always some degree of risk associated with loans issued for projects under construction. As a result, financial institutions are always wary of loaning money for construction projects. An unfinished project will require the lender to re-assemble the project time or invest in a new team that can assess the unfinished project site and continue construction without any lapses in build quality. Furthermore, a default on a project can capsize a project when problems relating to the foundation or predicted unprofitability of the project arise.
In order to counteract the various risks and uncertainties that arise throughout a construction project, financing plans usually include a reserve amount to act as a buffer for minimizing the impact of unforeseen expenses, cost increases, or liquidity problems. This reserve is typically identified as a special reserve or a contingency amount in the official project budget. It could be a borrowing agreement with a financial institution used to procure a line of credit, or in the case of publicly traded bonds, funds supervised by a third party.
According to Carnegie Mellon University, reserve funds determine their value by considering “the difference between the interest paid to bondholders and the interest received on the reserve funds plus any administrative costs.”
Negotiation and Review
As with any financial arrangement that involves loans, the period of time for negotiation and review can be lengthy. This is especially true for publicly traded bond financing, which has extremely particular legal requirements. Revenue bonds are typically issued against a seven-month schedule. Examples of financing activities and when they should be completed include:
- Analysis of Financial Alternatives: Weeks 0-4
- Preparing Legal Documents: Weeks 1-17
- Preparing Disclosure Documents: Weeks 2-20
- Costs and Revenue Forecasts: Weeks 4-20
- Bond Ratings: Weeks 4-20
- Bond Marketing: Weeks 4-20
- Bond Closing and Receipt of Funds: Weeks 4-20
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.