Friede News & Updates

Figuring It Out

[fa icon="calendar"] Oct 19, 2019 8:18:36 AM / by Matthew Krogman

Matthew Krogman

Construction Financing Planning_LR

“We’ll figure it out.”  This is a phrase I say to clients fairly often but, until a recent conversation, I didn’t realize how much it crystallizes the holistic client service approach we take at Friede & Associates.

My conversation with our client, Josh, began with his calling me to discuss how we should incorporate and relay to his bank some cost variations for his project—specifically how it would affect his loan structure, and resulting ramifications. 

Now, you might be asking yourself, “Why wouldn’t he just call the bank and ask them?”  This is a valid question.  After discussing the details, implications, and impacts of the decision I said, “I don’t foresee this as a significant issue.  Let me just make some calls and do some digging and…we’ll figure it out.” 

Josh’s response surprised me a bit...

“You know Matt, when we first started working together my wife and I often heard you and Scott [Truehl] respond to what felt like major, potentially project-halting hurdles with a calm demeanor and ‘we’ll figure it out.’  At first, we didn’t give it much weight given our experiences with the previous contractor, but you guys have delivered on a solution every single time. Now, if I get worked up about something and you guys are confident we can figure out a solution, it honestly calms me down and helps me sleep at night. Thank you.” 



Frankly, such an earnest compliment was both as unexpected and as gracious as I’ve ever gotten.  It impacted me so much I spent much of the next several days thinking about how something as simple as “We’ll figure it out” could provide our client so much peace of mind.  To help explain I’ll need to rewind and provide some history and context as to how we got involved in this project. 


This is how it all started...

Around Thanksgiving last year, I got a call from a business contact asking if I could do her a favor and talk to her friend who was having major concerns with the progress of his construction project.  Always willing to help out where possible, I said I would, and we set up a call.  This would be the first time Josh and I discussed his project. After about an hour of asking questions, learning the details of the development and listening to Josh’s concerns, I made a recommendation I’ve never made before: Fire your contractor and thank your lucky stars you never executed a contract. 

Suggesting to someone they fire their contractor is certainly not advice I give loosely, however, in this case it likely prevented Josh and his family from having to file bankruptcy. You see, the concerns Josh shared with me boiled down to three massive red flags which helped inform the decision.  First, Josh had bank financing approval in place for five months and still didn’t have a set, finalized budget for construction from the contractor.  Second, the contractor was unwilling to sign industry-standard, AIA contract documents for services.  Instead, he wanted loose-form generic documents that would not provide the protections Josh should have. Third, and most important, the “estimate” for construction services that was provided for the project was wildly lower than the real costs should have been. 

Construction Financing | Friede & AssociatesI thought, at first, Josh didn’t fully understand what number I was asking for.  Once I knew he was giving me the correct figure, it was time to move on.  We aren’t talking a few percentage points in cost here.  The previous general contractor was under the real budget number by 40%.  The implication here is that had Josh moved forward with the estimate for construction as it was, he would’ve been about half done with the project before needing to go ask the bank for a budget increase of 40%!  Of course, no bank would accommodate that, and the only way out would’ve been a foreclosure and total loss of the project including all the equity into the deal.  How do I know this it how it would’ve played out?  I used to be a commercial business banker and have seen these disasters transpire. 

Josh and his wife, Jenn, took the advice under consideration, talked to their other partners involved as well as with the bank and architect, and everyone agreed with the assessment to sever ties with their general contractor. 

“Well Matt, you’re our guys now.  What do we do next?  We have a project with complete plans, financing in place, and municipal approval and we have to start over.  How do we get this to work?”  My next piece of advice for Josh and Jenn was to get a realistic budget number by engaging some strategic partners for the mechanical, electrical and plumbing services, then to take the rest out for bid and get some real numbers back in a few weeks.

We didn’t know the exact budget at that time, but we have built enough similar projects to know the other general contractor was substantially under budget.  I had the pleasure in this circumstance to be sitting with Josh and Jenn in their kitchen two days before Christmas to tell them that their project was going to need a 40% budget increase to be built as designed. Talk about an early Christmas present! 

Friede & Associates | Wisconsin Design-Build ConstructionAfter taking some time to process the information I received another surprise response.  “Well, that really sucks.  But I’m just happy we have a real number.  Now we can plan and figure out how to try to make this work.”  It was at that moment I knew we had a partner who was truly invested in their project and would do anything to make it a reality.  So, we started our analysis of their business plan and we began adjusting the numbers.  We worked through the updated upfront equity that would be needed to make the deal work with the bank given the increased budget and that’s where we hit our next sticking point. 

“How are we going to come up with the additional equity without going to outside investors?” was the issue Jenn kept coming back to.  “Well,” I thought, “this is in a tax increment district.  Did you or anyone talk to the municipal folks about any TIF (tax increment financing) that could be available for this project?” The response was “No. Frankly, we have no clue how to even begin that conversation.  How does that work with our bank and the project?  How do we even apply?”

The Friede team works with municipalities and developers on TIF negotiations all the time.  We can absolutely assist and guide clients through the process.  So, I made some calls to determine exactly what we need to be done in this case. Again, we’ll figure it out.

Fast forward a month; we had the budget dialed-in, the TIF in place and all is starting to look like the project is moving our way.  The next hiccup arises, “The bank we started with was great and helped us a ton, but they can’t do TIF loans. We won’t be able to utilize all the equity from the municipality we need to make this project happen. Now what?” 

I responded, “Guys we’ve been through the numbers on this for months and this is a great project. I know there’s a bank locally that will be able to accommodate this development.  Let me make some calls to some of my contacts in the industry.  We’ll figure it out.” 

After reaching out to several banking contacts around Madison and discussing the project, I found the financing team.  They had experience with this type of project before, they liked the numbers and projections from the business plan, and could accommodate a TIF loan allowing Josh and Jenn to utilize all the equity from the TIF. 


Not only were they able to make this deal happen, but we were able to restructure into a more favorable type of loan note saving Josh and Jenn around $25,000 in fees. 


We’ve now completed construction of this project.  While unexpected issues arise along the way in any development, the key to success is how you respond to creatively solve the complications. The more I contemplate why we are able to help our clients successfully navigate these difficulties, the more I believe it has to do with the “We” in “We’ll figure it out.” 

Curious about this project? Click to see photos >>

To me, it doesn’t mean “we” as in just the folks at Friede, it’s the royal “We”  as in, all of the partners who are involved in a construction project—from the architect, engineers and subcontractors to the bankers and investors, municipal officials, and city planners. 

At Friede & Associates, we are able to communicate and quarterback these discussions with the partners so well because our team includes a former bank lender, a regional economic development consultant, the former head of a public/private county economic development corporation, planning commission members, redevelopment authority members, and city council members.  We understand that when it comes to constructing a vision, there is a lot more than just that hammers and nails. We'll help you figure it out. 

 

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Topics: preconstruction services, financing

Matthew Krogman

Written by Matthew Krogman

Matt brings more than a decade of consultative business services experience across a wide array of industries including: corporate expense management, human capital solutions, and business banking and finance. Prior to joining Friede & Associates, he spent four years at a major regional bank assisting customers with financing and underwriting commercial real estate development and acquisition. His industries of specialization include: food and industrial manufacturing, multi-unit housing, medical practices, and mixed use commercial.

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