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The Construction Consultant’s Role on the Workout Team

The “W” word is one that lenders would rather not utter.  But the reality of the recent economic morass and its effect on uncompleted construction projects, and, therefore, their underlying loans, is that workouts are inevitable as more projects  become troubled.  Construction lending carries a considerable amount of risk.  Distressed and troubled properties, of course, differ in the nature of their problems and, consequently, in the construction lender’s path to hopefully salvaging some portion of return.  The reasons for the troubles during construction are myriad, including poor management and significant schedule extensions; inadequate contract documents (which can lead to a plethora of change orders and cost overruns); lack of control of the finances; inexperienced developers, contractors and subcontractors; undercapitalized developer; and; in some cases, blatant dishonesty.  Each project and its problems are different and, therefore, the solution or path to recovery is likewise unique.  If the lender chooses to take over the project, either by utilizing in-house workout expertise or an outside servicing agent, a construction consulting firm with workout experience is an essential team member.

The construction consultant’s basic responsibilities focus on brick and mortar issues, construction contracts, permits, and budgetary elements.  Establishing where the project stands is the essential first step and involves physically observing the construction, determining its conformity to the contract documents, and, most importantly, establishing what it will cost to complete the construction so that the project can be brought to market.  Merritt & Harris, Inc.’s Workout Group generally adheres to the following process when it is asked to assist a lender on completing a distressed or underperforming project:

In a recent actual case, Merritt & Harris, Inc.’s Workout Group was called in to assist a small bank with a problem construction loan.  The project under construction was a multi-use building which was to contain residential units (condos), ground floor retail stores, and community facilities.  At the point of the Workout Group’s involvement, the project had exceeded its budget, and any semblance of a schedule had been long abandoned.  A major contributing factor to the problematic process was an inexperienced developer whose primary interest was an industrial company that he owned. In addition, many work stoppages had occurred due to building department violations (mostly regarding construction safety and the lack of a hoist – the building exceeded 75 ft. in height), and permitting problems.  The lending bank had not retained a construction consultant to monitor the project.

The first order of business for the Workout Group was to tour the project to determine its existing condition and state of completion.  Based on the information gained by this assessment, the group’s cost estimators were able to determine a cost to complete the work, which at that point was 25% higher than the original budget.  Because the developer was a favored customer, the bank chose to work with him rather than foreclose on the property.  The bank required that additional equity be injected into the project and increased the amount of its loan.  At the Workout Group’s urging, an expediter was retained to deal with the building department issues.  At the developer’s insistence, the general contractor was kept, as were most of the subs.  The project continued with a new budget and revamped construction schedule while being monitored by the Workout Group’s project manager.

It would be good to report that all went well from that point on, but, alas, the bad habits of the developer and contractor were not cured.  The work continued to drag on, not adhering to any schedule.  As so often happens in these situations, the contractor and architect began to lose interest in the job, as the duration of the work was now approaching five years.  The Workout Group’s project manager had to jump in as cheerleader and insist on regular meetings including the developer, general contractor, architect, and expediter.  With much pushing, pulling, threatening, and pleading, the project was eventually completed.

Residential Smart Meetings

While commercial building owners seem to be relatively well informed regarding ways in which they can save energy, homeowners are less likely to be aware of the newer means and methods they can employ.  M&H Observations staff asked Joseph Marciano, P.E., LEED AP, Senior Associate of Merritt & Harris’ Mechanical Engineering Group and its resident “green” guru, what devices are available to homeowners today that could save them significant dollars in the long run.  Joe’s response was LED lighting and smart meters.  LED lighting is covered in the lead article. Here is Joe’s explanation of smart meters:

“Most people ‘run up a tab’ with their electrical utility, hoping that when the bill comes, it will not be too much higher than the last one.  There are lots of practical, cost-effective, energy-saving ideas on the market that will likely save money, such as purchasing compact fluorescent or LED light bulbs or energy star appliances.  Knowing how cost-effective any specific measure will be is normally based on an estimate.  Energy Star labels are very useful in this regard, but there are many variables that can change the actual cost, especially the length of time any specific electrical product is on. Consumers pay for kilowatt hours, and, unless they are very large consumers, they probably will not pay directly for peak demand usage in kilowatts. Sophisticated energy management systems have been around for larger users for quite some time. These systems include plans for load shedding to shave the peak, but the concept of a ‘smart meter’ has only recently started to catch on.

The smart meter is essentially a meter that tells how much energy is being used at any given time and, also, records energy consumption over a period of time.  This information can be plotted so that a graph of kilowatts vs. hours is generated. The area under the curve is the kilowatt hours, and this can easily be converted into dollars when it is multiplied by the rate.  Consumers cannot stop time, but they can reduce the kilowatts.  With a smart meter’s information displayed on computer screens, they can make changes and see the difference.  For example, if consumers replace three 60 watt light bulbs with LED’s that use 6 watts each, they will see the power drop by that amount (162 watts).  They will, also, see that they are saving money while the lights are on, in this case about five cents per hour using New York’s Con-Ed rates.  This is, perhaps, a simple example, but it is an important step in terms of knowing how and when to save energy.  With smart metering, consumers will see the power jump when the refrigerator’s compressor kicks on and be able to identify the larger loads that cost them money.”

For further information about Merritt & Harris’ energy auditing services or just to find out more energy-saving tips, contact Joe Marciano, at 212.697.3188, extension 371, or e-mail him at jmarciano@mharrisinc.com.

Spring Cost Corner – Commercial Construction

by Mike Dwyer, Principal

Office to Rental Residential

Construction costs are starting to increase primarily due to the cost of materials.  Material costs from steel shapes to aluminum and copper are seeing year over year increases of 3.5-9.0%.  New commercial construction is starting to see glimmers of hope for a modest recovery, as we said in our last newsletter, but there is still no clear image of the light at the end of the tunnel.

In recent months, we have been engaged to review and monitor a number of conversion projects.  Although many traditional workouts are still being classified as “Special Assets”, there are groups of investors and some lenders who are starting to seize the opportunities of low prices to purchase at below market rates and turn the properties into income producers.

While no conversion or renovation can be considered “typical”, and a cost per square foot cannot adequately give a rule of thumb cost for a renovation, the chart included above is based upon an actual project.  Unit costs can be gleaned from the chart for such items of work as window replacement, renovated interior finishes, and conversion of mechanical, electrical, and plumbing from residential to office, be wary that the scope of any project must be carefully reviewed to ascertain whether the budget is reasonable.  The reference costs are “baseline” costs and must be adjusted for locale.

If you have a specific project you are evaluating and would like a comprehensive cost analysis, please feel free to contact us.

What’s New In Green for 2011?

With the advent of LEED, Green Globe, and a myriad of other real estate-related energy conservation programs, interest in new building-applicable technology abounds.  New products continue to bombard the investor and building owner, many of which, it seems, are destined to be outmoded before they gain acceptability.  Some, however, have the potential of impacting the “green building” market for years to come.  We’ve put together a list of the new products that we at Merritt & Harris, Inc. believe have the potential of piquing the energy-conscious building owner ‘s curiosity during 2011.

Solar Energy

Improvements and innovations in solar energy equipment seem to be continuous.  In recent years the advent of BIPV (building integrated photovoltaics) have given the conservation engineers exciting new tools.  The BIPVs are lightweight and flexible and can be applied to almost any exterior building material, including structural fabric.  The benefit of the new BIPVs, aside from their lightweight and flexibility, is that they require fewer system components and electrical connections and, therefore, less labor to install.

The most interesting solar innovation in the renewable energy segment may be the advancement of the organic photovoltaic(OPV) technology originally developed by Xiaomei Jiang, a University of South Florida physicist.  An OPV product called SolarWindow™ by New Energy Technologies Inc. of Maryland is a patent-pending sprayed-on film that uses the world’s smallest functional solar cells (1/4 the size of a grain of rice).  The ultra-thin film only slightly diminishes the transparency of glass (similar to tinting, a plus in sunny climates) and does not require the high temperature application or vacuum deposition process that other thin films require.  Because of the OPV’s superior optical absorption capacity, there is no need to “point” the cells directly at the sun.  For this reason New Energy Technologies Inc. envisions turning the entire glass surface of a high rise building into a solar collection site.    According to Renewable Energy World.com, engineers modeled a 40-story building in Tampa and estimated that  SolarWindow™ would result in a cost savings of $40,000 to $70,000/year, which they contrasted with a polycrystalline silcon aray on the roof that would produce a $20,000 energy savings/year.  If this technology proves to be commercially viable and its efficiency can approach acceptablility, this will indeed be a hot product in the future.

The same New Energy Technologies Inc. is currently testing another interesting product.  MotionPower™ harnesses excess vehicle energy (kinetic or rolling energy) and converts it to electricity.  The collection device resembles a speed bump with a flat plate attached and is located where vehicles are rolling to a stop, such as at drive thru lanes, stop streets, toll booths, and similar locations.  The manufacturer anticipates that MotionPower ™ devices placed at toll lanes will provide enough sustainable electricity to power the toll plaza.

Mechanical Equipment

Johnson Controls’ new York Model YK-EP Energy Plus 8,800 to 11,200 kW capacity chiller, can use entering condenser water temperatures as low as 55°F during off-design conditions.  OptiSpeed™, an optional variable-speed drive, is touted by the manufacturer to save another 30% each year.

Lighting

There is no doubt that any discussion of energy-conservative  lighting has to conclude with light emitting diodes (LED bulbs).  With a product that uses 80% less energy and lasts 50 times longer than a conventional incandescent bulb, there exists no reasonable argument regarding the efficiency of LEDs.  The drawback for many is the current initial cost.  A 60 watt equivalent indoor soft white LED is listed at $39.98 at Lowes in Brooklyn. NY, although less expensive deals can be found online.  But the LED bulb industry is really in its infancy and the prices still reflect the high research and development costs.  LEDs are available in tube configurations that allow the replacement of standard T-series florescent bulbs in existing light fixtures.  We can expect that cost will reduce significantly in the near future.  Even at today’s prices, however, the direct energy savings and heat load reduction can make the payback period reasonable.

One drawback for LED lighting has been its inability to be dimmed using in-place traditional dimming switches.  LED bulbs are either on or off,  and reducing the power, as occurs when dimmers (rectifiers) lower incandescent light levels, has no effect on the LED bulb until it goes out due to insufficient power.  Cree Lighting, however, has developed LED bulbs that are dimmable to 20% of their original brightness using standard residential dimmers.  This represents a big step forward for residential usage and lighting design.

Strange, but true

While the previous predictions for 2011 are extensions of on-going technologies, this one is, to say the least, different.  NewScientist.com reported the discovery that the use of urine as an energy source may advance the technology of hydrogen fuel cells.  It seems that the power of liquid waste comes from urea contained in the urine.  Because the hydrogen atoms in urea are less strongly bonded than those in water, less energy is required to separate them.  Hydrogen, therefore, can be harvested using less energy than separating out hydrogen from water by traditional means.  Scientists have been able to reduce the energy required in the separation process from 1.23v to just 0.37v.  The result is a significant reduction in cost and a giant step in the development of feasible hydrogen fuel cells.  Those same scientists estimate that a 300-person office can generate approximately 2 watts of power a day.  Using the same formula, a hi-rise office building could generate a significant amount of power.  In the future, workers may hear a loud speaker announcement like this one, “The air conditioning is using more power today – drink more coffee.”

Cost Corner – Low-Rise Commercial Buildings

by Michael J. Dwyer, Principal, M&H Cost & Review Group

Tough times for the construction industry continue to support last year’s forecasts of an overall 7 percent decline in non-residential construction spending for the United States.   Despite forecasts for a subdued economic recovery and a relative scarcity of nonresidential building construction, construction costs, year over year, have generally risen by roughly 2-3 percent.  This increase reflects the actual cost of materials and labor.  However, with limited construction activity, contractors are submitting bids at reduced rates to get work.  For a developer, this can be a good thing and some developers will seize this opportunity to maximize the scope of their project.  As a lender or equity investor, this can be a dual-edged sword!

The risks associated with investing and/or lending for any given construction project are aplenty.  From a pure construction perspective, the risk that a contractor cannot complete the work for the contracted price can significantly impact the budget and schedule.  While the lower than anticipated construction costs are welcomed at the project outset, if the contractor had priced the job at a loss, the potential for non-performance exists.

Low-rise office construction of projects that were bid, built, and completed during the past year resulted in the following mean costs:

When comparing project budgets to conventional historical data, there are many aspects of the actual project that require evaluation.  Location factors, which are percentage adjustments for particular localities, are applied to mean cost estimates.  Construction inflation factors, which are cost adjustments to historical data to reflect the latest labor rates and material cost adjustments for a particular locale, must also be applied.

Taylor Made in New Jersey

Sports venues often bring national attention to regional foods.  Chicago’s Soldiers’ Field is known for “brats” (bratwurst, not difficult children) and AT&T Park in San Francisco brought us garlic fries.   And what would an Eagles or Phillies broadcast be without a shot of a tailgater grilling cheese steaks?  The New Meadowlands Stadium, recently completed home of the NFL’s Jets and Giants, now serves a food product unknown beyond the borders of the Garden State – the Taylor Pork Roll sandwich.  Taylor Ham, as it’s called in North Jersey, or just “pork roll” in South Jersey, is nearly impossible to find across the Hudson in Manhattan and draws blank stares when ordered west of the Delaware River.

Taylor Pork Roll is not scrapple, Spam, Canadian bacon, nor is it similar in taste to any other product.  Taylor Ham is a sausage-like, uniquely smoked and spiced, 4″ diameter roll of savory pork, pre-cooked and traditionally bound in a cotton, canvas-like casing (although it is now available sliced and boxed).  To cook it, one slices the roll (Thick or thin is a fiercely defended matter of personal taste.), makes 3  or 4 – ¾” “ticks” at the outside edge of each slice to prevent it from “cupping” in the center, and slaps the slices on a griddle or barbeque grill.  On a sandwich, it is most often topped with a slice of American cheese. (Any other type of cheese constitutes a culinary foul.)  Pork roll has long been a staple at the ubiquitous New Jersey diners where “Taylor Ham and eggs” (also known as the “Jersey Breakfast”) or “Taylor Ham, eggs, and cheese (also known as the “triple by-pass”) are the diner patron’s breakfasts of choice.  The food is so popular in New Jersey that my little local bagel shop, Bagel Supreme in Rutherford, goes through 120 pounds of the stuff each week. (My favorite is Taylor Ham on a Black Russian Bagel – yum!)

Historically, pork roll is said to trace its roots to a similar product, packed minced ham, which supposedly was produced during the Revolutionary War.  Pork roll, as we know it, was first commercially produced by John Taylor of Trenton in 1856.  Taylor kept the recipe a secret, but other locals attempted to duplicate his “Trenton ham,” as the product was originally named until the Federal Food & Drug  Administration deemed that it was not, in fact, a ham, but a pork product.  George Washington Case, a local butcher and farmer, created his own recipe in 1870.  The firms founded by both men survive today and continue to produce pork roll.  Loeffler’s Gourmet is the third major producer of Jersey pork roll.

At a recent trade show, I asked the sales manager of a firm that manufactures stadium food kiosks whether his Rochester, New York firm had made the Taylor Ham stands for the New Meadowlands stadium.  He proudly responded, “Yes we did.”  I then asked if they knew what Taylor Ham is, and he responded, “No we don’t.”  I told him that I’d ship him some.

So when you visit the New Meadowlands Stadium, visit one of the Taylor Ham stands and treat yourself to a sandwich composed of two medium thick slices of pork roll and cheese on a hard roll (Jersey-speak for Kaiser roll).  At $5.50 it is the bargain of the concourse.  Dab a little mustard on your new found prize.

You’ll no doubt become an instant Taylor Ham aficionado.  When you get home, spread the word of your newly discovered taste treat.  Perhaps we Jersey natives can overcome talk of Hoffa’s burial place and MTV reality shows and become known for a wholesome All-American gourmet treat.  Better yet – keep your discovery to yourself.  We’re kind of fond of Taylor Ham or pork roll being a Jersey secret.

(For those who are part of the great New Jersey Diaspora, Taylor Ham and Jersey pork roll can be ordered on-line and shipped anywhere in the U.S.  from the following websites:   www.jerseyporkroll.com, www.houseofporkroll.com, or www.caseporkrollstore.com.   You’re on your own to find a decent Black Russian bagel.

Technological Chameleon – The New Meadowlands Stadium

Finally, after four pre-season football games, a collegiate lacrosse tournament, several  Bon Jovi concerts, and an international futbol game (US vs. Brazil), the New Meadowlands Stadium opened “for real” on Sunday, September 12, 2010, with the NY Giants playing the Carolina Panthers.  The stadium then held its second “real” game in record time, with the NY Jets playing the Baltimore Ravens on Monday Night Football the very next day.  It’s good to get the regular NFL season going, because the stadium is, after all, a football stadium first and foremost.  The Giants had a happy opening, winning 31-18, while the Jets were less joyous after being beaten 10-9 by the Ravens.

The Jets and Giants are co-owners of the huge stadium through their joint venture, the New Meadowlands Stadium Company LLC.  At 2.1 million gross square feet, it’s more than twice the square footage of the old Giants Stadium.  The approximately $1.6 billion or $1.7 billion venue (depending on whom you talk to or what publication you read) is the newest M&H Sports (Merritt & Harris, Inc.’s sports facility group) project to open.  (As the construction consultants, we know the actual cost, but you’ll have to keep guessing as we are sworn to secrecy.)  The stadium is the 30th major sports facility the group has worked on.  M&H Sports provided document and budget reviews and is monitoring the construction for the stadium’s lenders.  Whatever the real price, there is no question that it is the most expensive stadium built to date in the United States and probably in the world.  (Wembley Stadium in London at $1.5 billion had held the record.)  The price tag reflects New York area construction costs and the pre-recession bidding.   It’s not as visually striking as the Cowboy’s year-old pigskin palace (M&H Sports’ 29th project), but there is a reason for the building’s seeming austerity.  The design had to present a tabula rasa, upon which the colors, logos, and visual essence of two very different, but equal, owner teams could be applied, and alternated in a very condensed time span.  The answer was to transform much of the neutral form by using LED technology, morphing the basic gray background into shades of Giant blue or Jet green as the game required.

Technology (a reported $100 million of the cost) is where the 82,500 seat facility shines.  Teaming with Cisco Systems and Verizon, the world’s most technologically advanced sports venue was created.  Cisco’s StadiumVision system powers the digital displays that range in size from the four huge 30’ x 114’ Daktronic HD-X Series visual displays (scoreboards) to the more than 2,200 HD monitors spread throughout the building.  A 3’6″ high x 1,818’ long continuous ribbon display board surrounds the stadium interior, while 20 HD video pylons, ranging in height from 20’ x 40’ to 20’ x 60’, are sprinkled around the building exterior.  Suite patrons can order their food on touch screen monitors.  In fact, the building has more HD square footage than any other building in the US.  And all of the billions of diodes emit backgrounds of blue or green, according to which “home team” is playing.  Jet fans no longer have to suffer the indignity of sitting in blue and red seats.  The seats are shades of neutral gray, and there  will be no tell-tale signs that fans are in anything but their own stadium.  For concerts and other entertainment events, the stadium’s decorative and informational schemes can be manipulated to be appropriate to the show.  Verizon has teamed with Cisco to provide 34 HD channels into the stadium, allowing patrons to view multiple games and other video content.  Verizon has also provided a wireless network throughout the stadium to service mobile applications that will bring fans team news, player information, scores and highlights and direct them to the concession stands with the shortest lines.

Mark Lamping, President & CEO of the New Meadowlands Stadium Company LLC, points out, “Through the use of technology, we have set the bar for sporting venues in the future…(and) we bring to our fans one of the most tailored and unforgettable experiences in sports today.”