IRVINE, CA-Lenders take an enormous risk in extending construction loans to developers. Third-party construction management consultants can lower that risk by acting as the lender's eyes and ears during the construction process. Terry Dungan, client manager in construction risk management in the Irvine office of Partner Engineering and Sciences, explains the nature of his business. 

GlobeSt.com: Terry, what is the focus of your department?

Dungan: Our task is to analyze and monitor a construction projects for our lender clients. Partner Engineering has the comfortable position of standing between the borrower and General Contractor on one side and the lender on the other. We work with the lender, borrower and contractor to help make sure the project can be completed to all specifications meet and that documentation is accurate and submitted on time.

GlobeSt.com: What’s the most notable change in construction lending in the past few years?

Dungan: The big thing, obviously, is the huge downturn in construction. This downturn is primarily due to problems in the economy, particularly failed banks and stock market volatility. Lenders have imposed new restrictions, requirements and guidelines since the fall of the economy. Most lenders have had to cut back on staff and no longer have the in-house resources to handle all that is required on a construction loan.

GlobeSt.com: What kind of physical due diligence do lenders need for construction loans?

Dungan: With new guidelines and rules in place, lenders are really holding borrowers to the letter of the law, to put it mildly. Now, more than ever , it is extremely important for lenders to have qualified and dependable third- party consultants. When evaluating prospective loans, lenders look for a thorough Pre-Construction Document and Cost Review to help them get to closing. Let me explain: When someone wants to borrower money for a construction project, most banks are more than willing to work with them. However, the bank s wants to know if the project they are being asked to loan money on is feasible, so the bank asks the borrower to explain the plan for the project. This explanation takes the form of various documents like the budget, plans, specifications, contracts, “will serve” letters and so on. For ground-up projects, lenders want to see environmental Phase I, geotechnical and PML reports. As you can imagine, these documents can be very lengthy. Unless the bank employs a specialist for commercial construction projects, reading and understanding the document package can be very difficult.

GlobeSt.com: What are some of the past mistakes that lenders can learn from today to minimize risk and get the most value for every dollar disbursed?

Dungan: Prior to the economic collapse, loans were easy to get and there were many of them. There were so many loans and projects that it was difficult, at best, to keep up with them. As soon as one ‘draw’ would get funded, there would be three more loan requests waiting for the lender. A lot of detail was skimmed over in an effort to push loans out the door. Banks were skipping inspections while funding every other draw. It’s very different these days. Loans are being handled the way they should always have been done. After the loan closes, construction can begin and the lender disburses funds to the General Contractor as the work goes forward. Usually on a monthly bases, the General Contractor will submit a ”raw package” documenting the work completed for that time period, again, usually about a month’s worth. Each draw is the basically the GC requesting funds be disbursed to cover the cost of the work he just completed. A draw package is submitted each time and includes a number of documents supporting the request. Banks have become much more concerned with the details in recent years. They no longer fund draws without the proper documents and an inspection.

GlobeSt.com: What are the key qualifications a lender/borrower should look for in a THIRD-PARTY construction risk management consultant?

Dungan: Coverage, experience, communication and an acceptable fee structure.

GlobeSt.com: What are some of the trends in construction risk management you are seeing recently?

Dungan: Currently the majority of projects I see involve government funding and/or loan programs. I’m also seeing growth in assisted living and low-income housing developments. Another area that took off we didn’t see so much of five years ago are “cost to complete” projects. When the economy fell, a lot of construction projects were well underway. Many of those projects had secure funding and were completed on schedule. However, many of the projects saw their funding fly south for the winter, or actually three or four winters! Anyway, projects were left incomplete. Half built structures sat out in the weather for years untouched. With real estate at extreme lows, many of these properties are being bought up. The issue now is that buyers don’t have a complete understanding of the condition of the structures on these properties. We’re being engaged to perform thorough inspections on half built properties and give detailed opinions in detail on the estimated cost and requirements needed to finish the proposed project and/or convert it an entirely different use.