Questions Raised by Coronavirus Construction DelaysMarch 20, 2020 – Alerts
Across the country, construction projects are closing down as a result of the Coronavirus (COVID-19) pandemic. Contractors are leaving the sites and providing notice that a force majeure event has occurred. Specifically, contractors are citing the pandemic as the reason for the work stoppage, and, with their suspension, comes a request for an equitable extension of time within which to substantially complete a project.
Duties Triggered by a Project Halt
When a construction contractor halts work before a project is complete, a number of issues arise. Property owners must, among other things, do or cause the following to be done:
- Secure the project site from damage;
- Secure any materials already ordered and located on or offsite;
- Secure the site to protect the public from injury;
- Insure project sites and materials;
- Examine construction completion deadlines required by lenders and/or investors;
- Examine all rights and obligations under all construction contracts;
- Explore efforts to minimize financial impacts; and
- Consider what current and anticipated losses may be covered under existing insurance policies.
Questions Relating to Force Majeure Declarations
While we understand the contractors' need to protect their employees, does a contractor have a right to declare force majeure where the local or state government has not required the work stoppage? What happens when there is conflicting orders? The City of Philadelphia, for example, established restrictions on commercial activity and a halt on non-essential city government operations. This executive order designates general construction services as an essential infrastructure and industrial business and, therefore, not subject to the new restrictions. Meanwhile, the governor of Pennsylvania issued an order that all non-life-sustaining business are to close, and in that mandate, construction was considered non-life-sustaining. The same has happened in California. With no federal mandate, this is now a state-by-state issue. Likewise, whether the COVID-19 pandemic constitutes a force majeure event is undecided.
Affordable Housing and Tax Credits
Within the affordable housing industry, another challenge exists regarding deadlines for low-income housing tax credit (LIHTC) projects during this pandemic. Currently, a 9 percent LIHTC allocation under Section 42 of the Internal Revenue Code of 1986, as amended (Section 42), requires that units be placed-in-service as of a specific date. For numerous LIHTC developments, a delay due to the pandemic means a placed-in-service date in breach of the requirements of Section 42. Investors and lenders to LIHTC developments will also be left in the lurch as construction loans continue beyond their scheduled dates of maturity and equity is not funded.
Lobbying Efforts Underway
There are no answers … yet. On March 18, the ACTION campaign, a coalition of more than 2,300 organizations and businesses across the United States, released a statement calling on Congress to extend, by one year, the most significant LIHTC deadlines under Section 42, which are the 10 Percent Test, the Placed-In-Service Test and the Rehabilitation Test. It was requested that Congress extend deadlines by 12 months for each, recognizing that construction will either be slowed or halted across the country. Additional changes to LIHTC rules may be necessary to adapt to the current crisis.
We will continue to monitor the situation and work with clients to ensure compliance with the various rules and regulations.