Dungan: There are inherently more problems you come across when there is a rehabilitation or an addition to an existing structure over a ground-up project. It’s because when there is a rehab, you’re going into an existing structure and coming across things that couldn’t be seen prior to demolition. Rehabilitation has always had more chance per issue than ground up. With ground up you run into issues with a Phase 1 or an environmental issue. But with ground-up construction it’s pretty straightforward.

GlobeSt.com: Why is it important to underwrite the general contractor?

Dungan: It’s very important to understand all of the components of the construction project. You want to understand the land that you’re building on. If it’s a rehab, you want to understand the building that you’re going to be adding to. You want to understand that the costs of the components you’re putting into it are accurate. You also want to take a look and make sure the project itself is going to fit in with the surrounding area. There are a lot of different components that go into when a lender considers loaning money on a project to underwrite the assets.

The one group that has the largest time commitment on site and affects the project the most is the general contractor. You may underwrite the budget, the proposed project, but the one component that really needs to be looked at is the contractor because they can affect the most change and/or progress on a project, so it’s very important to underwrite that individual.

GlobeSt.com: How does your construction-progress monitoring program take place? What do you do to monitor a site?

Dungan: One of the things we need to do is understand the type of project that we are going to be looking at and assigning the right inspector that has experience in that particular type of construction. There is a lot of difference between a two-story garden-style apartment and a six-story office project. Then we’re going to take a look at their budget each month and make sure there’s enough money to meet the budget. Up front we want to make sure that what they are requesting during that particular period is getting done. We’re going to look at the budget and make sure the funds were supported by the work that was completed. And we want to make sure that the work that’s completed is consistent with what is spelled out in the contract. We also monitor that they remain on schedule.

GlobeSt.com: What can happen if there is no funds control program in place?

Dungan: If you’re not following every single fund step by step and everything is not consistent with the contract, a lot of small errors can domino into a larger issue. Prior to the recession, there was less scrutiny, and some projects were way off budget and by the time you get to the end of the project, they were off schedule. What we’re trying to focus on now – and some of the requirements are coming from lenders – is to make sure on a monthly basis that everything is picture perfect prior to the disbursement of funds just for that particular month. Then when we get to the next draw, if everything to the draw prior to that was perfect, if all the work was in place, we have the documentation to support the releasing of funds for waivers, invoices and so forth. The importance of good funds control is not just necessarily making sure the project is on schedule, the work completed is consistent with the specs, but also making sure all the paperwork is in line and there’s a good track record. Every single month should stand on its own.

GlobeSt.com: Is there one biggest mistake that developers tend to make?

Dungan: There’s not necessarily mistakes they make, but maybe oversights. What we’ve found is, in a lot of situations, they underestimate their contingency or some of their soft costs. No matter what project we’re doing, we’re going directly into the contingency, and the contingency standard is about 10%. If there’s anything I could say in that particular area is to make sure there is a contingency, so if there are cost overruns then they’re covered.