The banking sector troubles are a nightmare for homeowners-in-waiting too. When IndyMac Bank was seized by federal regulators last spring, one of Grew’s clients received a phone call assuring him that his construction loan was intact. The client hasn’t seen a dime since. Meanwhile, work on the roughed-in, 12,000-square-foot house is at a virtual standstill. “They’re trying to keep one lonely superintendent puttering there,” Grew says, while they figure out other options.
holding pattern With one eye on their frayed balance sheets, architects are also scrambling to keep the cash flowing. Last fall and into the dark first quarter of 2009, as consumer confidence plummeted and projects went on hold, many firms were forced to trim staff. While some reductions do help staunch the bleeding financially, layoffs also mean fewer bodies and fewer billable hours from which to pay fixed expenses, such as the mortgage, utilities, and liability insurance.
With receipts down, House is reviewing his firm’s fixed costs line by line. “Working with our accountant last year, we made a chart and tracked every penny to determine where to cut costs.” He and co-principal Cathi House reduced monthly expenses by 25 percent by making operational changes, such as delaying equipment and book purchases and switching to less expensive phone and Internet service providers.
Hearing rumors that banks might shut down lending, some architects stored up cash by emptying out their credit line accounts while they still could. “We just took a chunk, figuring it would be enough to help us weather the storm but not so ridiculous that the payments would sink us,” Grew says. And at a time when others are lowering their fees to get work, his firm is charging 5 percent more to help cover costs.
Cultivating a relationship with a fiscally healthy lending institution is another survival strategy. When he needed to finance the construction of a small building for his firm last fall, Dan Shipley, FAIA, of Dallas-based Shipley Architects, bet that the local community bank was a safer place to borrow from than a debt-ridden megabank. He’s happy he did. “I was hearing about credit markets drying up and was concerned that even if my bank could continue to make loans, the terms might not be the same,” Shipley says. “But they were, because the bank is prudent and hasn’t gotten itself overleveraged. I deal with the bank president; he knows and cares about us.”
With snipped credit lines becoming commonplace, architects are resorting to unusual business arrangements that let clients temporarily keep their hard-to-come-by cash. As a sole proprietor, Kenneth Crutcher, RA, Crutcher Studio, Farmington, Mich., is more nimble than larger firms. He’s agreed to delay billing on a low-income, market-rate housing project until his client’s tax credit financing comes through. “He couldn’t provide us with a retainer, but we’re going ahead anyway, figuring that funding will be there when the job is done,” says Crutcher, who teaches part-time in Lawrence Technological University’s College of Architecture and Design. With the Detroit area’s economy in the deep freeze, he’d also consider a barter: a portion of his design fee in exchange for an ownership stake in a future development project.
Diversification—a classic plan for maintaining a financial lifeline when the economy sours—may be less effective this time around, but it helps. When investment banks began to crumble last year, Rogers Marvel Architects, New York City, quickly cut 10 percent of its staff to conserve cash. Now that most residential work has stopped or slowed, the partners have a backlog of institutional and government projects. Still, they haven’t completely avoided collection woes. A housing developer owes the firm for design work on a 20-acre mixed-use master plan in Jersey City, N.J. “He’s not seeing any roll of his property, so he’s going to be out there for at least a year,” explains principal Jonathan Marvel, AIA. “There’s simply no cash flow at his end, so we’re being patient.”
affirmative action As Marvel suggests, architects who maintain positive business relationships in difficult times may find those bonds strengthened when recovery takes hold. It’s a principle that Irvine, Calif., attorney Randy Koenig says works for his architect clients. “View client relationships as a partnership you share in good times and tough times,” says Koenig, a partner at Koenig Jacobsen, which has a second office in San Diego.
To minimize exposure, Koenig recommends continuing to work with trustworthy clients who owe you money, if you can, but only on small projects. Another collection tactic: Offer a free service on a new project in exchange for getting paid on an old one. “You’re extending more good will with the understanding that you will get paid on the old stuff,” Koenig says. “It worked for my client.” The advice may seem counterintuitive, but it not only kept both parties busy, it also kept them in contact and created a little psychological leverage. In times like these, he says, “you have to go for the creative solution.”
Of course, the surest way to get paid is to choose projects with care. In the overbuilt Phoenix market, two of Circle West Architects’ large jobs went on hold this year. But the Scottsdale, Ariz., firm hasn’t been left holding the bag. To avoid that fate, principal Peter M. Koliopoulos, AIA, tries to keep one eye on local conditions, gauging them against what his team members are being asked to design. “We have a pretty strong awareness of what we can reasonably build and sell condos for, and what apartments can be leased for,” he explains. “We [strive to] have a good discussion with clients about time frame, how they’ll brand and present it to the public, and how they’ll structure their financing.” A solid prospect right now is troubled construction projects, at various stages of completion, being snapped up for a fraction of the price they would have brought a year or two ago. “The strategic design thinking from two years ago doesn’t necessarily align with what’s going on now,” Koliopoulos says. “We help developers evaluate the design and suggest something that better meets current conditions.”
