With the expected rise in interest rates looming, the
cost of real estate projects will be more closely scrutinized. Perhaps
the most critical factor in the cost equation with respect to interest
rates is time. Identifying possible sources of delays and working to
minimize the risks of delays maximizes the project proponent's chances
of taking advantage of lower interest rates.
The first opportunity to avoid delays comes at the due
diligence phase of a project. With the advent of many federal, state
and local government agencies providing access to government records
via the internet, thereby eliminating the need to visit several
different government offices in person, the initial due diligence
investigation can, in some cases, be completed in a matter of hours.
Examples of government records available on-line include municipal
assessor's records, registry of deeds records (and in some cases
document images), zoning regulations, environmental information,
corporate and U.C.C. records, court filings, and statutes and
regulations. The web portal www.firstgov.gov is an excellent resource
for finding such information in all states as well as the federal
government. In some cases, certificates from government agencies can be
ordered on-line, eliminating the typical delays in mailing requests.
Preliminary due diligence done early in the process
can identify lead time items such as required permits or outstanding
title issues which, if discovered too late on the process, could result
in project delays.
While the foregoing items are helpful to the project
proponent in avoiding delays within the proponent's control, the
proponent must take into consideration delays caused by other parties.
The opportunity to eliminate those delays comes in the operative
transaction document, whether it is a purchase agreement, lease or
construction contract. Setting early deadlines for delivery of
documents, such as consents, from the respective parties or from third
parties (e.g. lenders or lessors) can give early clues to problems if
those deadlines are not met. If third party consent to a project is not
timely delivered, such failure might indicate further negotiations with
the third party are needed, which can lead to delays.
Scrutinizing a lender's financing commitment also
provides opportunities to avoid delays that can result in a lost
interest rate. Foremost is the commitment's expiration date. In the
event the financing commitment expires, its extension on the same terms
may require payment of additional fees to the lender. In addition,
the preconditions to closing must be reviewed to identify long lead
time items. Delays in obtaining lender required permits and approvals,
surveys, environmental reports or appraisals can also jeopardize a
closing date, and consequently jeopardize an attractive interest rate.
In some cases, a lender might require delivery of such items in advance
of the closing in order for the lender to complete its review of the
Protections in the form of compensation for delays
built into a contract can help to offset increased costs from a rise in
the interest rate. Liquidated damages clauses, or "penalty" clauses in
contracts are one method of addressing delays in contracts. Penalty
clauses have the effect of shifting the cost of the delay onto the
non-performing party. Whether in the form of an adjustment to the
purchase price for delays caused by the seller, or per diem damages for
delays in completing construction (and consequently the closing of the
permanent financing), penalty clauses can compensate the proponent for
an increased interest rate caused by a delay.
While true "penalty" clauses are not generally
enforced in contracts, if the penalty clause is in the nature of a
liquidated damages provision, where the amount paid to the
non-breaching party bears a reasonable relationship to the harm
suffered because of the delay, then courts are generally more likely to
enforce such a provision in a contract.
While no one can see into the future and eliminate all
risk of delays in a project, foresight in the due diligence process
and the contract itself can reduce the risks of losing the benefits of
an attractive interest rate, especially in the current economic