Stalled ConStruCtion ProjeCtS:

Stalled Construction Projects: Causes and Cures

. . . . . . . . . . . . . . . . BROUGHT TO YOU BY . . . . . . . . . . . . . . . .

CLOUD-BASED CONSTRUCTION SOFTWARE

STALLED CONSTRUCTION PROJECTS: Causes and Cures

2

.........................................................................

Adequate planning before beginning construction projects is always preferred, but unfortunately planning won’t necessarily prevent a project from stalling once it’s underway. Even when estimators and planners assess, and plan for the unexpected, there are still events that come out of the blue and throw things off track. Consider the case of a property owner who secured a construction loan from a bank that later was closed by the Office of Thrift Supervision, and ultimately placed into receivership with the Federal Deposit Insurance Corporation. Perhaps the property owner could have dug into the bank’s books before accepting the loan, but that’s something that is usually beyond typical due diligence.

SHARE THIS eBOOK!

.........................................................................


3

.........................................................................

Larger economic winds behind many stalled projects In the face of all the imagined, and unimaginable things that can cause a construction project to grind to a halt, it shouldn’t be a surprise that projects stall, and the chief reason usually involves money. Projects stalling in the design phase don’t necessarily have the long-term consequences accompanying projects stalled once they’re underway. However, they do represent lost future construction activity, and in recent years, design phase stalls have affected new construction heavily.

SHARE THIS eBOOK!

.........................................................................


4

......................................................................... In the wake of the subprime mortgage crisis, the American Institute of Architects reported in September 2011 that nearly 50% of projects stalled in the design phase were in the under $5 million category, and more than 65% were new construction. At the time, 70% of architecture firms claimed to have one or more projects stalled and 60% of stalled projects from 2008 to 2011 were abandoned.

50%

Projects stalled in the design phase that were in the under $5 million category.

2011

AMERICAN INSTITUTE OF ARCHITECTS

60%

Stalled projects from 2008-2011 that were abandoned.

65%

Projects stalled in the design phase that were new construction.

70%

Architecture firms claiming to have one or more projects stalled.

SHARE THIS eBOOK!

.........................................................................


5

.........................................................................

There were more than 24 stalled construction projects in downtown Seattle and Bellevue, Wash., in late 2008. In February 2010 there were more than 500 stalled construction projects in New York City, which inspired an international design firm to suggest filling the empty lots with modular structures looking like icebergs. The icebergs were to be made from steel beams that could be quickly assembled into an iceberg shape and then covered by plastic with high insulating characteristics. The spaces could then be used as storefronts while waiting for the original projects to thaw out. While all of that construction inactivity was due to the economic collapse arising from the subprime mortgage debacle, the projects were stalling not only from lack of financing but also because residential and office demand was dropping and construction costs were climbing. SHARE THIS eBOOK!

.........................................................................


6

.........................................................................

The City of the Arts and Sciences in Valencia, Spain represents the style of Architects Santiago Calatrava and Felix Candela. It’s construction spanned 7 years, and was completed in 2005. Calatrava has created many structures that are now standing across the globe. But one that has never been finished is the Chicago Spire. Stalled since 2007, the project is marked by a vacant lot for sale with $93 million of debt.

SHARE THIS eBOOK!

.........................................................................


7

.........................................................................

A LITANY OF REASONS Sometimes projects stall from a perfect storm of circumstances. A stalled industrial park project in Tennessee is already $700,000 over budget, has construction in place that exceeds the specifications, costs $3,300 a week for three-days of independent oversight and is 13 months beyond its completion date. Other times, perhaps estimating and planning just wasn’t up to par as in the case of a children’s crisis center stalled because there aren’t any more available connections to the city sewer system. Then, there are identifiable direct results linked to inexplicable reasons such as the contractor deciding to extend the height of a building already approved for a lower height, even after putting foundation piles in the ground. The project stalled waiting for zoning approval. Of course there is always the possibility that a major component arrives and is not up to specifications such as the housing development that was depending upon modular units but when the first ones arrived they weren’t up to code. The project stopped in its tracks for 18 months.

.........................................................................


8

......................................................................... Here’s how the percentages break out for the reasons construction projects stall, as reported by the AIA in 2011 (numbers don’t add to 100 because multiple answers were permitted when responders had multiple stalled projects):

62.3%

51.8% 39.8% 22.2%

OTHER

6% COMMUNITY OPPOSITION

ZONING, ETC.

BUDGET

12.6% WEAK ECONOMY

Client Nervousness

Financing

13.8%

SHARE THIS eBOOK!

.........................................................................


9

......................................................................... Besides reasons for stalled projects already listed here, William W. Weisner, partner in the Real Estate, Construction, and Banking and Finance Practice Groups at Tarter Krinsky & Drogin LLP, and writing in “Stalled Construction Projects: How to Minimize Losses,” offers an extensive list, including:

1

Loans out of balance ..........................................

2

Equity sources not meeting their capital contributions ..........................................

3

Inexperienced developers ..........................................

4

Unforeseen litigation such as lawsuits related to the environment or local property owners ..........................................

5

Disputes with contractors

SHARE THIS eBOOK!

.........................................................................


10

.........................................................................

Fixing financially stalled projects For many projects, stalled for reasons other than financial, the panacea is one of litigation. Other times, it involves backtracking or design or scope changes. In almost all situations, it requires a comprehensive effort on the parts of all, or key stakeholders to find a workable solution. Sometimes though, abandonment is the only option. For those projects stalled for financial reasons there are some interesting fixes, according to Weisner. Here are some that came into play in the wake of the subprime mortgage crisis:

Creative rearrangements of the lender’s position such as increasing the loan amount in return for the lender’s own construction manager taking over, or allowing a new owner of the lender’s choice.

Strengthening owner’s position by bringing in new partners, selling the site to a new owner or adding a mezzanine loan.

SHARE THIS eBOOK!

.........................................................................


11

.........................................................................

Security instruments used in construction all the time won’t necessarily provide cover from the negative effects of stalled projects. For example, Chris Cheatham, CEO at ClaimKit, makers of DocKit for claim document management, says it’s unlikely performance or payment bonds would cover losses related to owners running out of money, the primary reason he sees for stalled projects. He says performance bonds guarantee that a project will be completed if a contractor is defaulted, while payment bonds guarantee that subcontractors and vendors will be paid if the contractor fails to pay them. Neither of those bonds would likely cover a stalled project attributed to an owner running out of money. However, a performance bond would cover a stalled project that is the result of a contractor not completing the work. SHARE THIS eBOOK!

.........................................................................


12

.........................................................................

Conclusions Construction projects will stall, but meticulous planning and scheduling can prevent some of the more common delays. Adequate documentation provides detailed information in the event of a problem or dispute. In the event of a necessary scope change, it is important for all stakeholders to have up to date information readily available in order to find a workable solution.

Click here to see a demo of how Procore’s cloud-based construction software can help prevent delays and keep projects organized.

...........

BROUGHT TO YOU BY .. . . . . . . . . .

CLOUD-BASED CONSTRU CTION SOFTWARE

SHARE THIS eBOOK!

www.procore.com | 866.477.6267


13

.........................................................................

OTHER REFERENCES http://www.chattanoogan.com/2013/8/20/257402/3-Month-Industrial-Park-ProjectNear.aspx http://earth911.com/news/2010/07/19/huge-icebergs-may-be-floating-in-downtownmanhattan/ 2011 Aspen Stalled Project - http://www.aspenbusinessjournal.com/article. php?id=5421 Forum Post - Contractor stalled - http://jclist.com/modules/newbb/viewtopic. php?post_id=82476#forumpost82476 Rosslyn Business Improvement District, (BID), Arlington, VA - had a downtown development effort stall due to the recession and instead turned the space into a public plaza and rain garden - https://www.downtowndevelopment.com/pdf/ DIX1112webextra_2.pdf Children’s Crisis Center stalled because no more available connections to the city sewer system - http://benjaminsbrasch.tumblr.com/ 2011 - Stalled Condos, Steamboat Springs, CO - http://www.steamboattoday.com/ news/2011/apr/22/competing-offers-sunray-meadows-condos-signal-stea/ UAE STALLED PROJECTS - http://www.ctbuh.org/News/GlobalTallNews/tabid/468/ EntryId/3875/Value-of-UAEs-Stalled-Construction-Projects-Hits-Record-High.aspx A CASE IN THE UK - http://www.fladgate.com/pubs/xprPubDetail. aspx?xpST=PubDetail&pub=8ea9570f-f468-47f2-b577-b29621b40ca2 TIPS ON TAKING OVER DISTRESSED PROPERTIES TO FINISH THEM - http:// constructionweblogs.com/tag/reo/ http://arcchicago.blogspot.com/2013/03/the-end-of-epic-dream-calatravas.html http://en.wikipedia.org/wiki/City_of_Arts_and_Sciences

SHARE THIS eBOOK!

.........................................................................