The Exit Draw – A Case Study: Exit Draws After a Fire

In addition to the contractors termination, are risky by themselves however there’s always additional levels of risk that face consultants that must be considered. This condition can also apply to a contractor termination for any other reason.

It’s notable that contractors of record are usually replaced after buildings suffer substantial damage by weather or fire for the following reasons that may include but not limited to: insurance companies have designated contractors to perform this work for less money; they generally pay higher rates for the work allowing the borrower to purchase additional items; the insurance proceeds are generally used 1st with lender remaining funds going to pay down the principal balance; in some instances the contractor is not qualified to restore the property.

The following is such a case where the contractor is seeking payment for materials stored on site damaged by fire. This is also an Exit Draw so there’s sure to be some drama or disagreement on signing the final documents to close out the loan. I have already spent considerable time going back and forth with the parties including the lender. It’s my belief that staying engaged, rather than pushing it upstream to the lender, will reduce my risk in the future.

Hi XXXXX, Thanks for contacting me.

After further review of my Exit Draw inspection notes and the material invoice provided to me for this purpose, I must deny your request for Sheet Metal materials damaged by the fire stored on site from your loan proceeds for the following reasons:

  • The materials were not previously paid for by the lender as a Material Draw, therefore not qualifying as a Change Order for overruns;
  • The subject materials were reported as “removed by others” employed or authorized by you;
  • The materials were never installed, making them a part of the building, although not necessarily a qualifier;
  • The invoice provided for payment, is from a third party not identified on your loan;
  • The material invoice does not identify either you or your property;
  • The material invoice submitted does not identify your contractor as recipient of the materials;
  • The material invoice submitted does not identify your contractor as end purchaser of the material in question;
  • In the case of fire, your insurance company would more than likely consider the materials as your contents;
  • I cannot accept random photos taken by others to support this, or any other request for payment that were not previously authorized to be taken for the purpose of payment from your loan;
  • The contractor has not provided evidence to corroborate a claim for mechanic’s lien in the State of Illinois;

In conclusion, I have prepared and sent your Exit Draw to be Docusigned with no request for payment along with the required documents to close out the project with this contractor. Should my assessment be disputed, please contact your lender for further assistance in this matter.

When reviewing invoices and purchase orders for any reason, make yourself a checklist similar to the one above to qualify the documents. As always my “risk management” may seem over the top but just like this borrower who had good insurance…there’s never too much when things start “breaking bad”

Dominic J. Valenti is a professional HUD Consultant in Chicago, IL #A0799