How do Lenders keep an eye on their risk when lending for a real estate development?

Welcome, the Independent Monitoring Surveyor.
 
Where a third party is providing finance on a real estate development, they will often require independent technical advice to assess risks on the development and monitor the progress in line with the contractual obligations. This is the role of the Independent Monitoring Surveyor (IMS), also known as Bank Monitor or Project Monitoring Surveyor. This service is usually provided by a Chartered Quantity Surveyor.

The monitoring is to manage the risks associated with a construction project on behalf of the lender and ensure all planning conditions are met together with all contractual obligations being satisfied.

On all construction projects there will be a contractual obligation to build to the required specification for an amount of money. Where the project will take a number of months (or years) to build the contractor will usually be paid monthly via Interim Valuations.

Where finance for these projects has been provided by a lender, there will be certain conditions in place for the finance each month to be released, to pay the interim valuations, known as draw downs.

The role of the IMS starts before any finance is released and can continue well past the last payment has been made, making them an essential part of the lenders and borrowers’ team.
For the IMS there are six key stages to the monitoring role:

1 - Appointment
2 - Due diligence
3 - Financial close
4 - Construction
5 - Completion
6 - Exit

 “The need for clear and unbiased advice is an essential aspect of the work of an IMS. The primary duty of care, considering the interests of the lender, must be beyond doubt, both in the appointment and in the assessment and reporting of project risk.” (Davies, 2005)
 
The appointment as with all appointments needs to have a clear scope, timescales set, resource allocation, identification of any conflicts of interest, fee schedule and terms of business agreed.
The due diligence will review the technical risks of the project with a view to confirming the conditions of the debt facility agreement have been met and any further risks are identified, and potential mitigation strategy proposed.

Financial close is the formalised reporting of the due diligence in line with the appointment, closing out any queries and all risks highlighted in a risk register or summary. Upon financial close the pre contract stage of the project will be concluded and the lender will be fully appraised of the status of the due diligence and financial risk position, ready for works to start on site.

The construction phase is where the lenders risks become reality and need to be managed as the finance is being drawn down. The IMS becomes the eyes and ears for the lender and all of the due diligence is exposed, proving the importance of the financial close stage.

Upon construction commencement a schedule is set up with the borrower and the lender for the draw down process and site visits, agreeing what information will be available and the report and certification format agreed. The IMS, although having no formal role in the design and construction team will attend site meetings and input their expert knowledge where appropriate and represent the lenders interests. They will also review all pre-visit information, attend site to assess progress and agree programme progress and drawdown amount with the borrower. A report is produced for the lender detailing progress, drawdown against cashflow forecast and highlighting key issues and risks.

Finally, a detailed discussion with the lender is had to ensure they are fully appraised of the project status and any queries are answered. This process will happen every month for as long as the project is on site.

At Completion there are a number of aspects that need to be considered to formally conclude the project. It is essential all certification required is provided, from a lenders point of view their risk will be significantly reduced when the building works are complete and the project is ready for occupation.

At this stage the IMS has to ensure the final account is agreed, any disputes are settled, defects established, and all contractual matters have been addressed, including collateral warranties and other third-party matters such as planning conditions, party wall issues etc. All of this will tie back to the lenders terms and conditions with the borrower.

Finally the lender exit stage, where the debt facility has been fully serviced by the borrower. The IMS is often no longer involved at this stage, however, there are circumstances where these services may still be required. These can include:-

- Remedying of defects
- Retention release
- Insolvency event occurring

This simplified overview of the role of an IMS highlights that at every stage of the construction process risks to the lender must be identified and managed for the drawdown to be confidently and correctly paid.
For further information on Lender’s independent monitoring surveyors, please contact us and we will be happy to discuss.
 

Bibliography

Davies, E. (2005). Lender's independent monitoring surveyor, RICS guidance note, UK. London: Royal Institution of Chartered Surveyors (RICS).

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