Real estate project finance concept: general features viola-funding May 8, 2024

Real estate project finance concept: general features

Project finance for real estates
Project finance for Real estates : financing options

The dilemma of every developer at the stage of preparing a new project is the choice of the most appropriate source of funds and the organizational form of the project. Currently, there is a wide range of instruments for Project finance for real estates, residential and commercial real estate projects of various types.

Viola Funding Limited has recruited a multidisciplinary finance team with solid experience in Project finance for real estates and development projects around the world.

Usually, developers use financing from internal sources and attract external financial resources by issuing shares or borrowing (loans, leasing, bonds).

We are ready to offer a large bank loan of 10 million euros or more with a maturity of up to 20 years.

If you are looking for a reliable source of funds for the construction of large properties or refinancing loans, contact us.

Financial engineering in project finance

All residential and commercial real estate projects are characterized by a complex planning stage and a long period of operation of finished objects.

Financial engineering in real estate project finance applies to the selection of funding sources and capital structure.

Demonstrated by projects for the construction of hotels, shopping centers or entertainment complexes.

Project finance for real estates requires a paid approach to risk assessment. PF assumes a rational distribution of risks between parties.

Finance team needs to calculate whether a given project has a positive or negative value, or calculate the rate of return. Of course, a detailed analysis of the financial projections is necessary.

Project finance looks complex, requiring a flexible combination of various financial instruments, including complex derivatives.

If you need real estate project finance services, please contact VIOLA FUNDING LIMITED.

Commercial real estates and Bank loans

In the project finance formula, the borrower considers the proceeds from the project as the main source of debt repayment. This type of financing is entirely based on the future cash flows expected to be received under commercial lease contracts, both already signed and ready to sign.

The use of a long-term bank loan is becoming an integral part of the process of buying / building commercial real estate in modern realities.

Currently, bank financing of real estate is most often carried out according to the project finance formula (PF).

But even today, when investors have redefined their attitude towards commercial real estate projects, there are ample opportunities for project finance in various areas.

Before the 2020 pandemic, project financing was widely used for the construction of large tourist facilities, hotels, shopping and entertainment centers around the world. Many capital intensive projects in the French Riviera, Barcelona and other tourist destinations in Europe have been built using this mechanism.

In the case of a PF, the borrower is usually an independent special purpose vehicle (SPV or SPE – Special Purpose Vehicle / Special Purpose Entity), which deals only with the construction and management of real estate.

Thanks to this structure, the project debt does not burden the financial statements of the initiators.

Assets are not used as collateral for debt, and the provider of capital (usually a large bank) issues a loan against future cash flows.

Banks’ requirements for borrowers and development projects

Ineffective collaboration can negatively impact project implementation. During the construction of real estate, the real estate project can change greatly, so the investor must not only assess the financial conditions, but also analyze the bank’s policy.

Before an investor goes to the bank with his project, he must answer a few questions.

First of all, does the project meet the basic requirements of the bank, necessary for the consideration of a loan application?

Bank’s requirements for commercial real estate projects are stated below;

• Technical requirements of the bank. To finance the project, a positive assessment of the project and a conclusion on the technical feasibility of the project are required. The initial document confirming this possibility is an architectural project, and then a building permit. In addition, the experience of an investor in commercial real estate or the ability to provide expert services is important for most banks.

• Marketing requirements. The Bank requires a positive result of market research, confirming the possibility of leasing retail space or selling real estate on favorable terms.

• Formal legal requirements. A reliable investment project must have an orderly legal status of real estate. In addition, banks pay attention to the presence or willingness of participants to create an SPV / SPE, the presence of building conditions or a building permit.

The choice of the financing bank should not be random.

Financing a construction investment project is a long process.

Alternative sources of project finance for Real estates

The greatest difficulties in obtaining loans are experienced by hotel and commercial real estate. Banks are still open to finance investments in warehouses, offices and residential premises, but financing conditions are more conservative.

Banks have also tightened their funding criteria and are now offering lower LTV and LTC options, expecting higher levels of pre-lease retail space and sales for residential properties.

Bank financing remains the most popular and affordable type of financing for commercial real estate projects.

However, the pandemic and economic downturn are forcing banks to treat borrowers more selectively, and development companies have become cautious with lending funds.

Funding for commercial real estate after 2020 is still limited to the best projects.

Moreover, today large construction projects are supported only by a few banks, and it is almost impossible to obtain credit funds for hotels.

Experts point out that this could be an impetus for investors to search for alternative financing methods, the availability of which is still limited in many countries of the world. However, the current situation shows that dependence on one form and lack of diversification of sources of financing for commercial real estate is a critical issue that threatens the survival of the business.

Regardless of the choice of funding sources, companies need to properly prepare for real estate investments.

A business plan, project documentation and financial analysis are the minimum that can become a prologue to serious negotiations on financing real estate construction.

Crowdfunding as an important tool for real estate funding

According to Forbes, the real estate crowdfunding market will reach $ 300 billion by 2025.

On this wave, not only investors will be the winners, but also online platforms, which currently remain in their infancy.

For investors in this type of project, the biggest advantage is the investment of small amounts. These are far fewer resources than they would need to acquire property on their own. Low financial requirements lead to diversification and reduced risk, since small investments can be easily spread among different types of real estate in different countries or in different currencies.

The project initiator also gains an important advantage through the use of crowdfunding.

Another big advantage is that with a well-organized fundraising campaign, the project can be completed faster than if the company relied on institutional investment. Moreover, crowdfunding platforms charge much lower service fees than banks, making real estate projects more affordable.

Equity financing or debt financing?

In this case, the profitability depends on what the income from the lease or sale of the building will be. If the property is sold, then the investor receives a certain percentage of the sale, corresponding to his share.

In the case of debt financing (bonds), the initiator borrows money from numerous investors.

The company then pays off the debt in several fixed-rate payments as agreed. In this model, there are very wide opportunities for both short-term and long-term loans.

In the event that an investor decides to participate as a bondholder through borrowed funds, and then the property starts to generate huge returns, the shareholders will benefit. However, in case of failure, the opposite will be true, and bondholders will be one step ahead of shareholders.

Equity investors take more risk, but if the project pays off, they make higher returns.

Banks also often condition the decision to grant a loan on the value of the LTC ratio.

Project finance for Real estates through a long-term loan is still the most popular solution among investors.

Almost all institutions on the market offer loans for real estate construction. However, investors are frustrated by the increasingly restrictive approach of banks to assessing a potential borrower.

The pandemic that led to the economic downturn is making it difficult to finance some retail, hotel and sports facilities around the world.

Of course, this situation does not exclude the possibility of concluding a loan agreement, but the proposals of banks may be far from your expectations.

If you are looking for attractive sources of financing for commercial real estate projects, contact VIOLA FUNDING LIMITED for advice.

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