In the planning phase of project development, you have ideas about a location for a real estate project. In this initial phase, it is advisable to consider how the real estate project can begin to be financed, if your own funds are insufficient to do so. What types of financing are possible? Can you combine forms of financing and what do you need to consider? Heleen Wessel-Krijger answers these questions in the blog below.
Types of financing in project developments
Although strictly speaking it is not a form of financing but co-ownership, equity can be an important form of raising funds to develop a real estate project. How does that work in practice? Investors "finance" part of the project and receive equity and control in return. As the project is developed, the value of the shares will increase and there may be profit distribution.
Well-known alternative forms of equity financing may include crowdfunding through websites, platforms or family and friends, angel investors, by wealthy individuals or funds who are sometimes advisors, or venture capital, which is invested in start-up companies.
The bank as financier in project development
A common method of financing is bank financing. In this, a bank provides funds for the development of a specific real estate project. As security for the repayment of the financing, a bank will request mortgage rights, pledges on future rental income, guarantees, sureties or joint and several liability. There are no shares, dividends or control in (bank) financing. At the end of the loan or credit, the financed amount must be repaid with interest and fees.
Combining forms of financing
Nowadays, in addition to the well-known banks, there are many other and also real estate-specific financing parties, which are entering the financing market. This allows the search for the best combinations for real estate financing. Not only should the financial aspects of the financing be considered, such as the amount of interest and repayment and the costs, but also the terms of the financing and the collateral required.
It may be advisable to use different forms of financing side by side for a project (equity, bank financing and other financiers) to get the most attractive combination of financing forms. This is sometimes referred to as stack financing.
What form of financing fits the phase of the building plan?
In the phase of shaping the building plan and looking at the zoning plan and obtaining the appropriate permits, it is important that financing becomes more established. Making a financing request requires thorough substantiation through a business plan, a financial analysis with a forecast of costs, expected revenues and an estimate of the value of the property(loan to value). The qualities of the management and shareholders and the company's organization and activities also weigh in when deciding whether to grant a financing request.
Different forms of financing = different financing terms
If different forms of financing are being considered, then consideration should be given to whether the terms of the different funders can be aligned with each other. In any case, they should be aligned. It must be avoided that obtaining one financing leads to cancellation of another financing.
During the realization of the project, one must keep a sharp eye on when and under what conditions (parts of) the financing can be called upon. Bank guarantees may also be issued by the financiers to various third parties/contracting parties, against which there are counter-guarantees from the project developer to the financier.
Sudden increase in project costs?
If the cost of the project rises unexpectedly and disproportionately and raising additional financing is necessary, this should be carefully coordinated with existing financing and the terms of the financiers already in place. Existing and additional collateral should also be considered. Providing additional collateral may conflict with previously contracted financing.
Upon completion of the project, the funds received must be used to repay the financing. The termination of bank guarantees to third parties must be monitored, as must the expiration of the corresponding counter-guarantees.
Are you embarking on a project or are you in the early stages and have questions about financing? Feel free to contact our project development specialists using the form below!
