How Developers and Lenders Are Increasing Profits and Turning More Deals — A Case Study
–Kathy L. Maschke

 Lenders, Developers, and Investors Partnering Together

When lenders and borrowers involved in development projects team up to hire a construction consultant, the entire project team-equity investors, lenders, developers, borrowers, architects, and contractors included-share in the benefits. During construction, the independent consultant's function is to provide due diligence, monitoring the project on a monthly basis and providing the client and project team with comprehensive, objective reports. Today, it is not unheard of for construction consultants to act as an independent third party, simultaneously representing the interests of the developers, equity partners, and lenders of a project. Some lenders may perceive joining forces in the use of one construction consultant as underwriting of self-interest, when in reality it is a win-win opportunity for the entire team. The construction consultant's comprehensive reports ensure that the final product meets the construction quality and delivery expectations of the entire development team.

The appearance of specialists offering construction consulting services to developers, equity investors, lenders, and owners is no small coincidence, but rather the result of hard lessons learned in the real estate development, banking, and construction industries since the 1970s. Although economic forces helped spur the evolution of independent consultants offering bank inspection services, today the typical bank inspector usually provides services solely to lending institutions, playing the role of the bank's "hired gun".

Construction Consultant vs. Bank Inspector

Chances are your development project will require the services of a bank inspector. As an alternative, consider hiring a construction consultant. One important distinction to recognize between a construction consultant serving all parties, and a bank inspector, is that the bank inspector reports his findings only to the bank. Although, this service certainly meets the needs of the bank, the borrower often perceives it as just another job cost. Construction consulting services are coordinated with all parties so everyone can share in the value. The consultant typically has decades of on-the-job construction experience coupled with a building systems or an engineering education foundation to offer the client and project team. That expertise far exceeds what the average bank inspector can offer. As John zumBrunnen, president of zumBrunnen, Inc.-a national construction consulting firm based in Atlanta, GA-explains, "The typical bank inspector cannot offer the level of services that a construction consultant provides. As an objective third party and a part of the project team, the consultant gains the benefit of having comprehensive first-hand knowledge of the project. Generally, the bank inspector is more of an outsider, not invited into these more confidential meetings.

The construction consultant can advise the client and project team about new technologies and approaches to building solutions that even their local contractor may not yet know about. As a respected member and neutral party of the project team, he can help facilitate the team through rough waters when tempers flare and relationships are tested. The construction site should not be a training ground for the inexperienced inspector, financed at the expense of the bank, developer, and investors. The borrower and owners, as well as the bank, deserve to receive full value for the services funded."

Developers' and Equity Partners' Perspective

The rationale for bringing a construction consultant on board to monitor the progress and quality of construction is a bottom-line decision from the developers' and the equity partners' perspective. As John Joyce, Executive Vice President of BVT Development Corporation, explains, "BVT Development Corporation is a subsidiary of BVT Development Partners. The company has operated in the US for about 23 years and we purposefully adopted a strategic policy to outsource engineering and construction services. This strategy has kept our overhead low and allowed us to select consultants based on their respective direct experience within the geographic region we are undertaking a development program. The advantage for BVT is that we do not incur corporate overhead expenses of an in-house construction services department and we gain the experience and knowledge that directly correlates to the type of project and to its geographic location."

Centro Ybor in Tampa, FL.

BVT, The Sembler Company, and Steiner & Associates are currently developing Centro Ybor, a 214,000 SF urban entertainment center in Tampa, FL that will be opening this summer. They have actually joined forces with the lending entity, Wachovia Bank of Florida, in hiring zumBrunnen, Inc. to monitor the construction for this project. According to Jim Milam, senior project engineer with zumBrunnen, Inc., "Centro Ybor, is an excellent case study of how a construction consultant can simultaneously represent the interests of the developers, equity partners and lender. By representing all entities, the construction consultant assists the development team in realizing critical construction issues that can improve the life cycle costs of Centro Ybor, and therefore add long-term value to the development. On this project, BVT brought us in as a consultant as soon as the architectural design was complete. By being on board as soon as there was a design to critique, we had a significant advantage because we could observe the entire construction process, from inception to completion, and make recommendations before work was begun."

Obtaining clear design details upfront, before any construction starts and establishing a protocol for communications throughout the project is critical to a project's success. Joyce emphasizes, "Communications are greatly improved with a construction consultant on our team because he is actually responsible for making sure that there is frequent and consistent reporting and communication on a project. This process ensures that everybody remains focused on the task at hand and the project remains on schedule." Jay Miller, Senior Vice President with Steiner & Associates, with offices in Tampa, FL and Columbus, OH acknowledges, "Typically Steiner & Associates oversees construction internally. However, in the case of the Centro Ybor project in Tampa, BVT wanted a third-party construction consultant to oversee their interests. That has been very useful for the team in terms of creating a comfort level, especially for our partners, based on objective third party monitoring of the status of project construction and the related budget." Tom Hareas, Director of Development for The Sembler Company, located in St. Petersburg, FL notes a similar perspective: "We have an in-house staff that oversees construction, so normally we do not outsource those services. However, with the Centro Ybor project, our partners brought in zumBrunnen because they wanted an objective third-party opinion to monitor their interests. We have found that having an external construction consultant on Centro Ybor has worked well for the entire team. The thoroughness of the services they have provided is far more than just inspecting construction to approve disbursements from the bank. Their monthly reports are very comprehensive and even with our own in-house capabilities, that objective and independent opinion has served as a resourceful tool."

Lender's Perspective

Although Wachovia Bank of Florida joined forces with the developers on the Centro Ybor project in utilizing the same construction consultant, this is not always perceived as an ideal situation from a lender's perspective. As Kent Harrell, Vice President Commercial Banking, with Wachovia explains, "We initially viewed sharing the resources of a single inspector as a potential conflict. However, in this situation the developers and the consultant convinced us that it was not only feasible to do so, but that aligning our interests helped ensure the project would be completed on time and within budget. The consultant tailored the reports they submitted to us to meet Wachovia's specific requirements so we received exactly the comprehensive information we required to approve disbursements."

Contractor Reactions

When a construction consultant represents the developers', equity partners', owners', and lenders' interests, the contractors on the job actually gain the objectivity of a third party to inspect the progress of their work. Typically, on a development project, the contractor only receives whatever portion of a construction consultant's reports that the developer, lender, and often the architect mutually agree should be shared. So how do the contractors react to a third party observing their work? "If the contractor's goal is to develop a quality product, on time, and preserve his profits, we have always been very well received by the contractors and subcontractors," says zumBrunnen. "Contractors may experience an unfavorable attitude from other members in the project team. They especially dislike when someone cruises through a month or so after they have built something and says 'this does not meet inspection, tear it out!' Naturally, the contractor will argue to the death against redoing the work because his profits will be greatly diminished. When a qualified construction consultant is on the team expectations are clarified upfront and the contractor is delighted with the clear channel of communications. Everyone benefits when all parties are treated equitably."

Return on Investment

Milam emphasizes, "The danger of not having a construction consultant on board to represent the developer's, equity partners', owner's, and lender's interests is the possibility of poor quality construction and increased maintenance costs for the final product. Those developers, investors, and lenders who have the foresight to recognize the value a consultant brings to the team, have been rewarded with increased profits due to the higher quality construction services their contractor's have subsequently delivered on time and under budget."

Once again citing the Centro Ybor project as an example, Milam explains, "The entire Centro Ybor development comprises four new buildings and one historic structure. The roof on one of the new buildings was installed in stages. We had the opportunity to evaluate it in the beginning stages and found some inherent design problems. We were able to work with the roofing contractor and resolve the issues early in the project. If an experienced construction consultant with knowledge of complex roofing problems and solutions had not conducted the inspection, our clients and the project team would not have been aware of these issues and would have spent thousands of dollars down the road to repair or replace these roofs." According to Joyce, having a construction consultant on board "assures that we get the return on our investment that we anticipated. An independent construction consultant can monitor, focus, and assure us that construction is consistent with the pro forma that we have approved for a project." Hareas agrees, noting, "we are also working with zumBrunnen on BayWalk, a similar project in downtown St. Petersburg, FL as a result of the positive experience we have experienced on Centro Ybor. We even specifically requested that Milam monitor BayWalk construction because we know that he has provided quality services on Centro Ybor. Once again, BayWalk is another unique situation where the construction consultant is providing AmSouth Bank and The Sembler Company with construction consulting services. This alliance is possible because the reports they provide are objective, thorough, and tailored to fit each of our individual specific needs. They serve as an excellent check valve for the project's successful completion."

Bill Williams, Senior Vice President of Commercial Real Estate with AmSouth Bank comments that "in addition to the construction inspection services, we find the pre-closing document review process to be of fundamental importance to the bank. Since we are not engineers, the bank must rely on professional consultants. It is of paramount importance to understand the total costs required to complete the proposed project, as well as the significance of any permitting and design issues. These costs and issues must be understood prior to our final closing-they have little value after the fact!"

Location, Location, Location.

Emphasizing the scope of performance based construction consulting services, zumBrunnen reminds developers, equity partners, lenders, and real estate players, "the construction consultant's ultimate goal is to put his vast construction expertise to work solving your particular construction problems so that in the end you have a quality product. Always select a consultant that is knowledgeable about the particular type of construction or property and who has a working knowledge of all site and building systems, such as paving, roofs, EFIS, mechanical, electrical, and plumbing. Also look for a consultant who is not only professionally qualified through experience and education, but who will also take a personal interest in the project, is a team player, and will remain objective." In the real estate industry it is often said that the key to success is location, location, location. When selecting an independent construction consultant to monitor a development project, developers, equity partners, lenders, and owners should recognize that experience, experience, experience is what makes a difference on their projects. The bottom line is that an experienced construction consultant can ensure frequent and consistent reporting and communication on a project so that you can concentrate on increasing profits and turning more deals!

Kathy L. Maschke is a freelance writer based in Atlanta, GA who has written about the construction, architecture, and interior design industries since 1989.