Inside Third & Bond: Week 115

For the guest bloggers from Hudson Companies, this week it’s all about the benjamins…Money is possibly the most important ingredient in completing a project. Just take one look at the vacant, half-built condo projects around town. Those projects aren’t sitting there for lack of workers or building materials. (Not Stop Work Orders either, surprisingly. Yes, we’re still cranky.) At Third + Bond, fortunately, knock on wood, our lender has been excellent. We started with Wachovia, which was taken over by Wells Fargo. This week we want to take a closer look at the requisition process that allows us to ask Wells Fargo for draws on the construction loan.

To start, we draw from the loan on a monthly basis. It’s not like a car loan for which you get all the money at once and gradually pay it back. We signed…

…an agreement with the lender in 2008 that set out the maximum amount of the loan, the interest rate and other relevant details. Since then, each month we ask the bank to provide us with a portion of the loan money based on our costs incurred.

The costs are represented in a packet referred to as the requisition or req. The contractor, whether construction manager or general contractor, compiles the hard cost requisition, which consists of an invoice from each subcontractor along with a lien waiver (a topic for another time). The hard cost req is complicated by a culture of haggling created in part by the funding timeline. The contractor wants as much money as possible as soon as possible. He has people to pay and supplies to buy. Plus, he knows that the request to the bank might be through January 15th but the check isn’t coming until January 31st, after the bank has reviewed and approved, and the owner sends the check to the contractor and the contractor sends the check to the sub. So the contractor tries to include projected costs as well as costs incurred.

The owner wants to pay only for exactly the work that has been completed. This way, if something goes wrong, say a contractor quits or is fired, there is still money available to continue the job. The owner knows that if he doesn’t give the sub some level of comfort though, the sub will put fewer guys on the job, dragging out the work. One of the balancing acts is recognizing the big picture of keeping the job moving while managing the risk of paying more than is immediately due.

Another point of contention between the owner and subcontractor is retention. Ten percent retainage on a contract is standard, and it’s enough to keep someone’s attention. If a contract is worth $100,000 and the first invoice is for $10,000, we keep $1,000. By the end of the job, we’ll be holding onto $10,000 and we’ll keep it until we’ve had a chance to see that the work is indeed complete. Except: over the course of the job, the sub will ask for retainage to be reduced and if things are going well and our bank loan documents permit it, we might gradually reduce the percentage withheld.

Once the requisition is prepared, the bank’s engineer comes (for doughnuts) and walks the entire site making notes about what is complete. He compares his opinions on what is done and deserving of payment with what is being asked for by the owner. Enter, the next period of negotiation. The bank engineer might look at a room and say, Looks like the cabinets are 30% complete and we/the contractor might say, Closer to 45%. At the end of the day, the engineer makes his recommendation to the bank and that’s what the funding is based on. At Third + Bond, we’ve had a great working relationship with our bank engineer. We have had jobs in the past though in which we felt it necessary to go above the engineer to the bank and ask that they reconsider recommendations.

The bank engineer isn’t looking only at what has been done on the site. He’s also thinking about our schedule and how far we have to go. And he’s on the look-out for materials being stored off-site. You see, we’ll ask for money to pay, say, the window guy who has completed the manufacture of the windows and is holding them at a warehouse someplace in Jersey. As far as the window guy is concerned, he’s finished his product and is ready to be paid. But maybe we need another week or so before the site is ready to accept windows, which are bulky to store. If we store materials off-site, then the bank asks for a bill of sale to prove that the material exists and is ours, photographs of the materials being stored, and a copy of the insurance policy for the storage location. They do not like material stored outside of an easy drive although we can’t recall any bank ever actually visiting the warehouse. With this documentation, the bank mitigates the risk of materials stored off-site disappearing or going up in smoke, or both if you are David Blaine.

We submit the requisition to the bank and they do a review of title, the costs we’ve requested be covered, where we are with the budget lines agreed upon in the loan documents, and then wire us the funds. Lenders differ on their turnaround time, a few days to a week is common. Once the funds are sent out, the amount is added to the loan due and as-such part of the interest calculation. We pay our bills and the project keeps moving. The bank lends, we spend, and, then it’s time again for another requisition.
A few years ago we were on a bank walk-through and joked that you aren’t really a project manager until you’ve had a single month’s requisition worth over $1 million. The bank engineer replied that you aren’t really a bank engineer until you’ve cut $1 million from a requisition. Really? we asked, hoping this wasn’t a clever lead-in to us on the chopping block. Turns out the engineer had done a mom-and-pop job in which mom—or was it pop—had asked for 1/3 of the entire loan in the first requisition because, the foundation was very expensive. Need a lot more than doughnuts to make that one fly.

Inside Third & Bond: Weeks 1-114 [Brownstoner]
Our legal fine print: The complete offering terms are in an Offering Plan available from Sponsor. File No. CD080490. Sponsor: Hudson Third LLC, 826 Broadway, New York, NY 10003.