Spring 2004-06 Navigating through the obstacles facing construction projects

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Number 55
Spring 2004

Navigating through the obstacles facing construction projects

The boom of construction development on the island has undoubtedly spurred our economy and along the way created more than a few construction development success stories. However, if you were to talk to any of these successful business persons, we're sure that they all would agree that their success did not come easy.

In fact, they would likely have numerous stories of trying times and experiences that they had to endure in order to reach the pinnacle of their industry. Although each story would undoubtedly be unique, we're sure you would also find that many, if not all, of them have experienced some common obstacles and pitfalls along the way. Clearly, there is no easy recipe for success and there is no success without some risk, however, it never hurts to try to minimize risk by learning from others experiences and by obtaining the help from the professionals that have the knowledge and experience to point you in the right direction, and hopefully around, not through, the waiting pitfalls.

Before starting the project

Before starting the project and, if possible, even before purchasing the land, the developer should make a series of preliminary investigations to determine whether the proposed project: (1) will be eligible to obtain the necessary government permits and approvals, and (2) is financially feasible and thus likely to be profitable. These determinations should be made with the assistance of qualified and experienced professionals such as appraisers, attorneys, accountants, architects, realtors and financial consultants. Also, if you have an existing relationship with a banking institution it is a good idea to run your idea by them as early as possible since they not only will likely be the ones to provide you with the construction loan (so you want to do the things the way they are going to require for the granting of the loan) but also they may be able to give valuable pointers on what they've seen has and has not worked on similar projects.

Licenses and permits

One of the most crucial aspects of a successful project is being able to obtain all of the necessary permits, approval and endorsements from the applicable federal, local and municipal governments and agencies in an expedient and cost efficient manner.

Although the Puerto Rico Planning Board is usually the starting point of this process, there are a number of other government entities which must be consulted. This list includes, but is not limited to the Puerto Rico Department of Consumer Affairs ("DACO"), the Puerto Rico Administration for Regulations and Permits ("ARPE"), the U.S. Corp of Engineers, the U.S. Environmental Protection Agency ("EPA"), the Puerto Rico Junta de Calidad Ambiental, the particular municipality where the Project will be located and government utilities such as the Puerto Rico Electric Power Authority, the Water Authority and the Puerto Rico Fire Department.

In many cases each of these government agencies have their own rules and procedures and sometimes they are applied on an inconsistent basis. Therefore, it is important to consult with or hire, one or more person(s) who dedicate themselves to obtaining the approvals from the particular agencies. Trying to do it yourself initially might sound like a good idea , however, you'll probably soon find out that you have wasted a lot of time or worse yet the agency may deny the approval due to some technicality which might have been avoided had someone with experience and connections prepared, filed and followed-up on your application.

The location of the project in general

There are going to be slightly different considerations depending on whether the units to be constructed are to be primary residents or second homes. However, in general, the following considerations should be analyzed:

(1) Is this a location where people want to live, does it have ready access to major roadways, schools, recreational areas, shopping and restaurants, and is it close to metropolitan areas, making the commute from work convenient?

(2) Is there a demand for the product you propose to offer or is there an excess of similar units for sale in your and neighboring areas which will be competition to those of your project?

The specific parcel of land

A developer must make thorough studies to determine that there are no conditions existing on the land such as rocks, protected kinds of vegetation or species of animals which can make construction thereon more costly or even prohibited by law entirely.

One must also make sure that there are no restrictive covenants encumbering the land which could place restrictions on your plans of what you want to construct and develop, since these covenants will, at the very least, affect the price you are willing to pay for the property .

Determine whether there is easy connection to the public utilities systems (water, electricity and sewage) and sufficient capacity to allow for your project to be granted use of these facilities without requiring extensive additional investments by the developer , as is often required by the responsible government agency, as a condition to the granting of the necessary permits.

Check who your neighbors are and what businesses they have, to see: (i) whether the use you plan, is compatible with those in adjacent or neighboring areas (there are no hazardous activities or nuisance causing residential or commercial neighbors); or (ii) whether you will likely run into strong objection to the project by one or more of your neighbors. Remember, these neighboring uses and or objections by neighbors may be costly to overcome and\or may also ultimately make your project less attractive to your potential purchasers.

Specification of the product itself

In general, the developer must make sure that he will be selling a desirable and easily marketable product to his potential customers. Considerations such as the size of the lot and or square footage of the house or apartment, design and layout of the unit, as well as the finishes it will have, recreational facilities of the project and parking for unit owners and visitors and last but not least the prices, can make or break a project!

In order to make the latter determinations, the developer needs to know who are his potential customers, what are their preferences and how much are they willing to pay for what they want in that location. A good realtor can often shed light on these issues. Once you have determined the ideal project for the good land you have found then before you begin pre-sales of the units you need to make sure that you set a price for the units which will be low enough as to make them attractive to potential purchasers (you don't want to price them out of the market) while at the same time high enough to adequately cover construction costs and leave an adequate return to the developer as to make the project feasible and thus financeable by a bank. This determination should be made with the input of a realtor which can give you an idea of what prices can be commanded in that area for that kind of project. However, perhaps even more importantly, you will need to have the hard numbers of the site and construction contractors based upon the plans prepared by the architect, since estimates from inexperienced persons can be dramatically underestimated and can lead to the wrong calculation of purchase price to be requested of the customers.

It is critical that these determinations be made prior to commencing pre-sales since once the developer commits to a certain price for a particular type of unit, by way of option or purchase contract, it will be very difficult to change this without being exposed to liability to customers who have signed contracts or fines imposed by DACO, unless these changes by the developer are due to unforeseeable or justifiable reason (as specifically and very limitedly defined in local case law). It should be noted that the case law on this point is extremely pro-consumer and thus a developer should make all efforts to try to avoid being in this position.

If the developer does not have the latter information at this stage, but he would like to get a sense of interest from potential customers, perhaps it's a good option to offer general information about the project and simply ask those who may be interested to subscribe their name on a list and the realtor will communicate them once the sales are opened.

The determinations described above can be made with the help of a good realtor and perhaps more importantly an experienced (one who works on this type of projects) real estate appraiser who will likely analyze these and many other factors in determining the value of the project and whether it is feasible as initially conceptualized by the developer. Based on the opinions of the appraiser, a realtor and perhaps your banker, sometimes adjustment to the concept can be made which will make the project more attractive to the potential customers and financially more profitable.

Preparations for commencement of construction of the project

If your location, land and product specifications have received favorable reviews up to this point you should be satisfied that you are commencing on solid ground but you should continue to proceed with caution and with the advise of experienced consultants.

The next stage of the project involves contracting (although you should have already received preliminary advice from these or other professionals) with the various professionals that are going to help you create and complete a successful and profitable project. This list of professional which may have to be contracted include the architect, appraiser, realtor, insurance broker, project manager and contractors (site and construction). Some of the general considerations an owner/developer should look at when choosing a team of professionals to work on a project are the following: (1) the experience and success they each may have had with other similar (size and location) projects; (2) accessibility and adequate financial and human resources of the particular professional, make sure that they do not have an excessive work load which will prevent them from being able to provide personal hands on attention to the project when needed, make sure they have an adequate support staff and adequate financial resources which will allow them to follow it through to the end; (3) make sure the fees they are charging are competitive, if at all possible before making a final choice receive bids from various different professionals; (4) make sure the team members get along and will work well together; and (5) make sure that the team members are satisfactory to the bank that will be providing the financing.

One rule which should never be broken (we know it seems self serving since its coming from lawyers-but it's true) is that you should never sign a contract (big or small) with anyone (stranger or friend) without first having your attorney review it and revise it according to your best interest. Remember, all of the contracts you are signing have to work together, in other words they can not be incompatible, they can not overlap and they must cover all tasks to be completed. Also, these contracts must also be in a form and contain provisions which the financing institution usually require. Furthermore, remember, no matter what kind of services you are contracting, there are always different professionals willing and able to do the task, therefore where there is competition there is always room to bargain and for all the major projects the owner/developer should receive various bids and then make a final determination. Don't get us wrong, we're not encouraging you to fight over pennies because the professional deserve to receive fair compensation for their services, however, the owner/developer should try to receive the best services for reasonable fees.

A general piece of advice is that if anyone encourages you to sign a contract blindly they are presenting you because you can trust them, that it's a great deal, start running the other direction!


© 2004 Goldman Antonetti