CONSTRUCTION PROCESS

CONTRACTORS

The first step in developing a project is retaining the firms that will build, and in some cases operate, the facilities.  Contractors involved in building the project will include architects, engineers and a general contractor responsible for overseeing the operation.  In some cases, the project will also involve a management contractor responsible for running the entire project or aspects of it once it has been built.  Unless the issuer has extensive experience managing capital projects, investors may want to know who the builder is, and they will almost certainly want information on a management company.

RECOMMENDATION: Investigate how the contractors were selected and find out about their past performance and their relationship to other parties involved in the project.
 

CONSTRUCTION PLAN

After selecting contractors, the issuer will generally work with them to develop a construction plan that includes an architectural design, budget and timeline.  The plan should include contingency plans, including the bonding of contractors to ensure that the job can be finished even if the contractor hired is unable to complete it.

LAND TITLE OR LEASE

One of the most common security provisions in a bond deal is a lien on the land, buildings and improvements that make up the project being financed (or, if the land is leased, a lien on the lease).  As a consequence, investors will generally expect the issuer to hold a legal title to the land and any existing facilities before the bonds are sold.  The issuer may also be expected to purchase title insurance. 

UTILITIES

Investors will generally expect the issuer to have agreements or plans in place to ensure the availability of adequate electric, water and wastewater services.  In some cases, infrastructure is easily available and sufficient to meet the needs of current users, the facility and additional development. In most cases, however, the project will require some combination of the following:

• Extension of existing infrastructure to reach the facility (i.e., water, sewer and power lines);
  
• Expansion of existing infrastructure to accommodate increased demand created by the facility; and
  
• Creation of new infrastructure on- or off-site to accommodate the facility.

Each option entails costs that may be borne by the project, the locality (e.g., county government, local sewer district), an outside agency (state or federal subsidy), or some combination of the three. 

RECOMMENDATION: Identify proposed sources of power, water and wastewater service and examine the impact of the project on overall infrastructure capacity and the environment to see whether the project is prudent, and whether it meets regulatory requirements

Regulatory requirements can include:

• Local, state or federal regulations governing expansion or creation of electric, waste and water systems.
  
• Local, state or federal regulations governing the use of existing electric, waste and water systems (especially as those systems approach maximum capacity).
  
• Assessment of the existing infrastructure to determine whether there is enough capacity to add the project to the system.
  
• Authorization from local utilities to use services and a contract specifying payment rates and any “participation fee” imposed to offset strain created on the utility’s infrastructure.
  
• Public and/or private permissions for the use of easements to run pipes and power lines through others’ property.
   

INSURANCE

In addition to bond insurance, which the issuer may pursue to lower the cost of capital, investors generally expect the project to be fully insured against events that could endanger the viability of the project and/or the value of the land and facility.  Examples include property damage caused by natural or man-made disasters and lawsuits brought against the project.

RECOMMENDATION: Find out what insurance has been acquired, who the providers are and what they know about the project

If insurance has not been secured, or if the coverage provided by the insurance is insufficient, either because it does not apply to likely risks or because the maximum award is too small, investors may have reason to be concerned.  If the insurance providers are unaware of information regarding risks that could pose a liability to them, they may choose to renegotiate or cancel the policy. Finally, it is important to verify that insurance policies cover not only potential liability or loss to investors and the project, but also to the sponsoring agency or the local community, if applicable.

ENVIRONMENTAL REGULATION/REVIEW

An environmental review or assessment may be required by state or federal law.  For example, if federal funds are used for the project, it may be subject to the National Environmental Protection Act, which requires environmental impact statements. For example, a resident of a county that was in the process of building a detention center to house federal detainees sued the U.S. Marshal Service under NEPA for failing to conduct an environmental assessment before pledging $3 million toward construction of the facility. The result was a delay in payment of the $3 million to the county that nearly forced the county to issue additional bonds to meet expenses.

Further, even if no review is required by law, investors may expect the issuer to conduct an environmental review to identify environmental hazards that might endanger the project’s viability or expose investors to legal liability. 

RECOMMENDATION: Investigate applicable local, state and federal regulations to determine whether the project meets all requirements, and if necessary, commission or conduct an independent analysis of the project's environmental impact

AUTHORIZATIONS/PERMITS

In addition to the environmental and utilities authorization previously described, there are many other regulatory hoops through which capital projects must jump in order to get off the ground.  Authorizations and permits that may be required include:

• Construction permits;
• Fire inspections or permits, which may be required before facilities open for business;
• Licenses, permits or authorizations to operate; and
• Zoning variances, if the project is located in an area whose current zoning regulations do not allow the proposed use.

Not all of the required authorizations and permits can be obtained before the bonds are sold.  While investors will not necessarily expect to see every permit in place, they will want to know that the major potential regulatory roadblocks to construction and operation of the project have been overcome or are being addressed.