Small Project Design

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Peter Morse AIA
Firm Owner/Architect
Peter L. Morse & Associates Architects
Rochester NY
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The topic of discussion here, and that the point I would like to make, is for our profession to better understand the process of "money flow" for project development and examine how it affects us and how we fit in to the total process. (It should be noted from the outset that this topic deals with private sector projects, and not public work). 

My ultimate goal from this topic here is to see AIA talk to banks and developers and eventually produce an "Investment" or "Architect's Equity" financial instrument or a process to achieve better fee structures for all of us.  This subject matter has not been discussed enough by AIA (to my knowledge) and needs to be further discussed and understood.  My point of discussion is made by the following scenario:

When a client begins the process of engaging an architect for a project, fees are traditionally viewed as a "business expense" by both banks and their clients, when in many cases (my point) should be viewed as a "business asset".  How so? Banks and owners tend to view the construction monies as a hard asset which is bankable and they exclude architectural fees in their loan structure (which ironically is integral to the building process) and are expensed out, which is the point here.  Design, construction documents, and associated services should be viewed as an integral part of the project and required service to the total loan package. 

Getting banks to understand and "buy into" this concept, and getting them to structure financing of professional fees along with construction loan would better serve their clients and the architect if this concept were embraced. The process of understanding when financing begins and structuring fees according to a bank model is tantamount for this concept to be developed.   

Money invested in a project up front for professional fees is part of the financial contribution by the owner necessary to begin a project. It is not considered a down payment, nor is it equity; rather it is a business expense required to begin, and owners tend to be very careful about guarding this line item expenditure in particular since it may jeopardize the total equity investment of their available money to a bank for their project.  Many times owners view architects fees as "at risk" because of this traditional financial structure and react by simply requesting a minimum of construction documents or administration services as a result of them closely guarding their required minimum initial investment, potentially derailing the project.  Contractor's profits are traditionally higher, since once the bank loan has closed, they have already locked in their anticipated profits.  The point here is when the when the bank closes a loan, the project's process has begun. For this discussion to be developed further, we need to know how the banks view the role of the architect, and how we can be better placed in this process.

I've talked with a few bankers in the past about the concept of financing architect's fee.  This notion wouldn't be acceptable in the purest sense, but may be a workable concept once the project has closed and is included as part of the total finance package.   The key here is structuring financed professional fees for architects not having the architect upfront the work putting them at risk should a loan not close. The solution may ultimately lie in negotiations of a workable payment schedule with the owner so they are more comfortable with expenditures and get the bank to be included by convincing them about our services, guarding their asset and valuation.

Architects have long lamented that realtors many times receive a larger commission for the sale of a property than the architect received for designing the project in the first place.  Why is this?  Money from the sale of a property is flowing from one established investment to another. The realtor is collecting their fees from an already established investment transfer without really jeopardizing the financial structure bottom line. They command higher fees for their work based on their placement in the money flow.  There are other factors at work here but I use this example to understand the concept.

 

I'd like your thoughts!

 

Best regards

 

Peter L. Morse AIA

Hi Peter (and all)
Very nice question/discussion opener, thank you!
I've working 'in the trenches' with realtors & bankers for a number of years, one-on-one, Bankers, Accountants and Commercial Realtors understand the concept of "Architect Designed Building worth more", i.e. the added value, perspective and positioning of a project that an Architect brings to an Owner or Developer.  However, implimenting it in the traditional private sector mortgage is much harder (but NOT impossible... the Banker needs to buy in to the idea).

When the SBA began accepting Architecture/Engineering fees to include in loan packages, it became much easier to accomplish, however there was/is still some issue with how a non-physical asset (i.e. intellectual property of a design) is depreciated (like real estate can be depreciated) if I understand the push back discussions correctly.

One of the "best" projects I had was one where the contractor and I found a banker who WANTED to see the Owner (a dentist) succeed.  Long story-short:  the SBA loan was structured for several components:  a)Land Acquisition, b)A/E fees, c)Construction Cost, d)Equipment Purchase (by retiring high-cost dental equipment lease) and e)Conversion to single permanent loan.

The young banker realized that the Asset-to-Loan Value equation was GREATLY improved by getting rid of the dental equipment lease (high % cost liability only with no increase of asset on balance sheet); and with that shift, the income potential for the Dentist easily covered the SBA loan requirements.  Setting up the first loan (land purchase) and 2nd loan (a/e fees & construction cost) and then converting all to permanent loan and including equipment purchase was a LOT more work for the banker, as was the additional documentation required for the SBA loan, but he gladly did it... just to PROVE to his seniors that he could be done.  The best part of this story... the Dentist was ready to give up and stay in a leased office facility - when I introduced her to my banker friend; and he bought into the idea - it was great for everyone (tooting my own horn... project NEVER would have happened without me, and making the proper introductions/connections).  True success and happiness story.

I have yet to find a banker who willingly takes on this challenge, but there are some.  Every chance I get, I share this story with bankers I meet; I'm hoping that because now we are seeing available cash in private sector banks, more interest in commercial markets, and investors getting off the sidelines, we can encourage MORE of this.  I also think this needs to happen with architect where the soles of our shoes hit the pavement, rather than relying on AIA to handle this for us.  It would be GREAT however if AIA invested a little bit in 'case studies' or 'Architect Designed buildings ARE worth more... here's the facts' media blast which Architects could share with bankers/realtors.  The proof is in the money.

Thanks again for a great post to get me thinking!
~Lisa



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Lisa Stacholy
President
LKS Architects, Inc.
Dunwoody GA
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