If construction financing runs behind schedule, how is PCG compensated?
via a delay fee (TBU)
In a CTL, what is a “construction completion guarantee”?
a guarantee from the lessee stipulating that improvements (or construction) must be completed by an outside date otherwise we would have the ability to exercise a put option requiring prepayment of our notes
How can a letter of credit protect a noteholder with construction risk?
the letter of credit can be drawn upon should the building not be completed
What is a “date certain rent commencement”?
when the lessee agrees to begin paying rent on a specified date whether or not a building is ever completed
In a CTL, how long does the construction period typically last?
18-24 months
Explain construction completion risk for a corporate or government credit
For a corporate credit, if the corporate tenant files for a bankruptcy prior to construction completion, the lease would likely be rejected, and PCG could (1) have to step-up to pay for any construction cost expected to be borne by the tenant (such as tenant improvements) in order to realize the full value of PCG’s security interest or (2) have to sell a partially completed building at a price that would likely not result in full recovery
For a government CTL, this risk doesn’t exist because there is no risk of a bankruptcy filing
What is a “GMP”? How does it work?
- Guaranteed Maximum Price Contract
- agreement between developer/owner providing that any construction costs in excess of GMP are borne by the general contractor (doesn’t cover soft project costs like architects, legal, engineering, etc)
- general contractor provides a payment and performance surety bond from a satisfactory guarantor and, in the event that the contractor doesn’t perform, the lender can draw the bond to fund the remaining construction costs
What is a “surety bond”?
A promise by a surety (aka a guarantor) to pay one party (the obligee) a certain amount if a second party (the principal) fails to meet some obligation, such as fulfilling the terms of a contract
What are considered “soft costs” in construction?
architects, engineering, legal, etc
