Delays to Construction Projects and How to Avoid Them
When developing for profit, time is money and getting development out of the ground quicker will often save considerable holding costs as well as reduce market risk. So why do so many projects take so long to get off the ground? In our experience, we see these four reasons come up constantly and effectively managing them will put you in an excellent position to make your project a success.
Delays with Permits
Suppose you are looking to get the most out of a site and “pushing the boundaries” regarding what can be done within planning regulations. In that case, it is understandable that obtaining planning and, ultimately, building permits will be a more complex process. However, it is often the case that only minor changes to plans that will provide questionable benefit result in considerable delays, often eroding the overall profits of the developer through higher holding costs. So how do you mitigate these delays? The ideal scenario is to purchase sites on longer-term contracts and settle with permits already in place. If this isn’t possible, the key is to get the design right as soon as possible so that no changes are necessary later. A developer should have a reasonable understanding of what they are trying to achieve on the site and get the plans sorted out early in the process, preferably with the council and a trusted planning advisor, to ensure you don’t hit hurdles later on.
It is too common to get through all the complex parts of putting a project together only to get to the last stage and find that there isn’t enough money available. You may still obtain the funding for your project in such situations. Still, your position for obtaining a good funding package is greatly weakened, and you may need higher funding costs to fund the project fully. It is essential to have as good a possible working feasibility early in the process to understand the likely project costs and a good idea of potential debt funding available and how much equity is required. You should have a good buffer regarding equity and project costs to ensure that you can cover cost increases and that the project can remain profitable if costs increase or the market drops.
Valuers are, by nature, conservative, and to be fair, they are often blamed by lenders when the market turns bad, so it is understandable. They do get it wrong from time to time, and in most cases they will err on the side of lower valuations, but a developer should be prepared for this. Good knowledge of comparable market sales is crucial to minimise the chances of a low valuation. For a construction project, the QS report should be completed before the valuation report is completed so the valuer can access the total construction costs. Providing as much information to the valuer as possible regarding the market will make their job easier and give you a better chance of a valuation working. Where possible, ordering the valuation directly before presenting it to a funder is preferable, as this gives you better communication with the valuer and flexibility around what to do in the event of a low valuation. You need to know the panel valuers for whichever lender or lenders you are looking to get funding from and ensure that you are working with a valuer who can present a report that can be used for the financing.
Issues with Legal Documents
It sometimes seems that legal documents for loans are getting more and more complicated, and that’s because, in many cases, they are. With English Common Law being based on precedent, new cases and decisions arise, and lawyers amend their documentation in line with such developments. Unfortunately, they tend to trend in favour of protecting the lender. While legal docs are relatively uncomplicated for banks and smaller transactions, usually, no negotiation is necessary for more extensive and more complicated transactions. This is rarely the case. Make sure you have a legal advisor who understands the commercial aspect of property development, is responsive and can negotiate a fair outcome for you in a reasonable timeframe so that negotiations don’t drag out for weeks.
Property development is a complicated business; the key is to be as prepared as possible. Hopefully, the above tips have been helpful.