How to handle weather-related construction delays

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El Nino is finally here and we’re pretty well prepared, at least with respect to the existing portfolio.

But, unsurprisingly, construction workers generally don’t love working in the rain.

And that confronts us with an irritating dilemma. We can:

  1. Suck up the resulting construction delays; or
  2. Bonus the workers (either directly or via their employing GCs) to work in the rain

On the face of it, bonusing the workers is annoying… it’s additional cash out the door, increasing your construction budget.

However, it’s almost always the better option. Why?

Because each project represents an enormous amount of “dead” capital until it’s leased back up.

That cost is born in either or both of the following ways:

  1. If there’s a bridge loan, then delayed construction results in more interest paid; and
  2. If it’s all cash, then the delay reduces the investors’ IRR, which, because of the pref we pay to investors, has the effect of making the project less profitable for us, as well

So, it’s bonus time for a bunch of construction workers. And we’re more thankful than ever for the normally-amazing SoCal climate, even though it’s vexing us right now.

 

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