Lending to Architecture Firms

By Fraker, Greg | The RMA Journal, May 2012 | Go to article overview

Lending to Architecture Firms


Fraker, Greg, The RMA Journal


[ILLUSTRATION OMITTED]

Because it is largely influenced by the amount of construction spending in the economy, the architecture industry is cyclical in nature. Construction spending, and thus architecture activity, usually outpaces the overall economy during periods of economic growth and declines when the economy weakens. The data in the RMA Annual Statement Studies[R] confirms this: During the recent recession, annual sales growth for the typical architecture firm declined from 13.5% in 2007 to -19.1% in 2010.

Regardless of the economic environment, you should consider several key factors before lending to an architecture firm. Among them are 1) the qualitative characteristics that influence a firm's success, 2) the quantitative measures that indicate if it's financially healthy, and 3) the quality of collateral and guarantees available. This article will discuss these three factors in greater detail.

Analyzing an Architecture Firm's Qualitative Factors

Although many qualitative factors influence an architecture firm's success, among the most important are its specific market niche, the expertise and experience of its architects and staff, and the quality of its risk management practices.

Market Niche

Because most architects prefer professional autonomy, their firms are usually small. Approximately 79% of architecture firms owned by AIA members have fewer than 10 employees. (1) Also, many architects have an affinity for and specialized expertise in a particular type of project. So before lending to an architecture firm, you should understand the types of projects the firm designs and which factors may influence the demand for them.

According to the 2009 American Institute of Architects Firm Survey, (2) institutional projects--for education, health care, transportation, religious, cultural, and recreational facilities--have historically accounted for about 50% of all U.S. architecture industry revenue. Commercial projects (office, retail, and industrial facilities) account for 30% of industry revenue, and residential projects (single- and multifamily housing) make up about 10%. "Other construction" and "nonconstruction" activities represent the remaining 10%.

Institutional projects are typically funded by government agencies (usually local and state governments) or by nonprofit organizations. Government funding for institutional projects is often determined by public-sector budgets. As David Johnson notes in his article "Municipal Distress: What to Consider When Working with Local Governments," public-sector budgets are often constrained by underfunded pension and health care liabilities, increasing debt service obligations, inadequate revenue sources, and practical and political limitations. (3) Nonprofit organizations, meanwhile, are typically funded through fees for their services, contributions from private donors, and government grants.

For commercial projects, demand is often influenced by real estate and economic factors, including the supply of existing commercial properties, interest rates, access to credit, and business and consumer sentiment. Architecture firms with a niche in commercial projects may be more adversely affected by economic cycles, as business investment in new or updated facilities often lags the beginning of an economic recovery, accelerates rapidly once a recovery is under way, and then declines steeply during an economic downturn. (4) The factors that influence an architecture firm's market niche should be analyzed within the context of the geographic area in which the firm operates. Traditionally, architecture firms have focused on projects within their own geographic market. However, owing partly to technology and also to a lack of local opportunities since the recession, some firms have sought projects outside their own market, including projects in other countries. (5)

Professional Expertise of Architects and Staff

Like other professional services, an architecture firm is often hired because of the reputation, expertise, and experience of its architects and other professional staff. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Lending to Architecture Firms
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.