We advise institutional real estate investors, including a wholly owned subsidiary of a leading property and casualty insurance company, on the design and construction contract issues that arise in connection with major real estate developments. These investors bring substantial capital to the table, often alongside developer partners and lenders. Our role is to focus on the quality of the underlying design, construction, and design-build contracts so their financial commitments are protected.
Oversight of Large Industrial Facilities
One engagement involved a 1.2 million sq ft Class-A industrial cross-dock facility with an $81 million guaranteed maximum price (GMP) construction contract. Our investor client, working in a joint venture with a prominent development partner, retained us to provide oversight of the contract negotiation. Our role was to make sure the lawyers working for the development side addressed key risk allocation issues and to add our perspective to protect the investor’s capital. We also had to account for early site work and long-lead procurement that began under interim agreements before the GMP was finalized, incorporating those complicating factors into the ultimate contract structure. The project was ultimately completed and leased, validating the client’s investment.
Forward Deal Apartment Acquisitions
We advised an institutional investor on two “forward deal” acquisitions of substantial apartment projects, each comprising over 250 units with construction contracts carrying GMPs exceeding $35 million. These so-called forward transactions allowed the investor to buy the properties before they reached substantial completion, taking on the remaining construction risk as part of an acquisition strategy that kept the purchase price lower than it would have been for completed buildings which hit the open market. That risk made our contract review central to the deal. We analyzed the Owner-Contractor and Owner-Architect agreements and proposed revisions to those executed agreements – revisions we recommended that our client seek, before committing capital, to better address issues such as scheduling, cost controls, change order procedures, insurance, indemnity, and mechanics lien protections. Our recommendations directly guided the investor’s decision-making on whether and how to move forward.
Mixed-Use and Multifamily Development Guidance
In another matter, we were engaged by the development division of a large integrated real estate firm on a $40 million, seven-story mixed-use project including around 160 units, retail space, and parking. Because its affiliated construction division was slated to build the project, our role focused on making sure the development arm’s interests were protected and aligned with those of its equity partners, as would be required of any developer in any arm’s-length transaction. We negotiated opposite and against separate outside counsel for the construction division to make sure the construction agreement, an AIA Document A102–2017, Standard Form of Agreement Between Owner and Contractor where the basis of payment is the Cost of the Work Plus a Fee with a Guaranteed Maximum Price, and its companion AIA Document A201-2017, General Conditions of the Contract for Construction, appropriately balanced risk and properly documented the parties’ respective roles.
We also advised an institutional investor on agreements for a seven-building, 300-unit multifamily development that included over 500 parking stalls and separate amenity buildings. Here, the investor’s joint venture partner had interests in both project ownership and the design and construction teams, raising concerns about conflicts of interest. We reviewed the Owner-Architect and Owner-Contractor agreements with particular attention to how those relationships could affect our client, ensuring the investor’s significant financial contribution was not disadvantaged by the overlapping roles of its partner.
Protecting Capital Through Careful Contracting
Our work for institutional real estate investors shows how careful attention to design and construction agreements can protect substantial capital commitments and align investor interests with those of developers, contractors, and equity partners.
Looking to protect your real estate investments with legal oversight on construction and design contracts? Contact our team today.
