In today's article we are going to study how to finance a real estate development project today. This article accompanies the previous one where we talked about the current situation of the Spanish real estate sector. For this we will talk about the financing needs in projects of these characteristics and what are the solutions that exist.
How to finance a real estate development project
The actors in real estate financing have substantially modified the risk analysis criteria after the crisis. These requirements are much higher than in the boom years due to the serious consequences they had on all financing players.
Today financing is analyzed based on:
- The expected generation of cash from the promotion business
- Compliance with minimum capital investment requirements by the entrepreneur
What needs to be financed in a real estate project
Before addressing the financing needs, we must clarify that currently in any project, the promoter must provide a project with financial, technical and urban viability. There are three edges that normally need financing:
- The payment of the lot
- The realization of the work
- The cash flows generated throughout the promotion
The payment of the plot is the acquisition of the land and normally involves other concepts such as licenses, municipal taxes, notaries. etc
Carrying out the work entails an investment in technical aspects that are important in each of the stages from the excavation to the end of the work. Although to finance this edge it can be done through installment payments on account, or other ways of financing.
It is vitally important to have cash flows well controlled in a real estate project, which is why continuous financing is often needed.
Requirements to finance a project
The financing players generally ask for minimum investment requirements for the promoter. The requirements are:
"They won't bet their money if you don't"
The first and fundamental requirement is the investment in the soil. It is an entry barrier for those projects that are not completely viable in some of the points that we have seen previously (financial, technical and urban).
To this day, no player finances the land in large proportions, what is more, they usually ask the developer to contribute at least 50% of the equity of the land.
Social demand for land
The social demand for land is important today since the experience of the crisis has shown that even if the developer had the option of acquiring land and lifting his promotion, if the end customer does not acquire the home, the promotion is doomed to failure. .
Therefore, in this aspect the type of final customers to whom the promotion is directed intervenes. With a good layout of land, it will be possible to carry out the necessary pre-sales to acquire financing.
"Promotions must be directed at a solvent demand in an appropriate place"
It is another aspect on which the financing of the project depends. The reputation, financial and commercial solvency of the promoter is essential. It is true that many promotions are carried out through newly created vehicle companies (SPV), but there are mechanisms that warn of the solvency of who is behind it.
Alternative solutions for project financing
A very recurring solution in this type of project are hebridging loans for developers. These loans are those granted by investment funds to developers who have land, or access to land to start a project but do not have enough resources to start the project and obtain the licenses, project and level of pre-sales that banks require to grant credit. promoter.
When is it cancelled?
Normally between 18 and 24 months.
What is the purpose of the bridging loan?
The purpose of this type of loan is that the promoter can acquire everything necessary to carry out his claims, such as acquisition of the land, necessary permits, contracting the construction company, buyers of the real estate and its subsequent financing.
What is the amount that is normally financed?
Normally, promoters are granted a loan that covers around 80% of the financing of the project, which means having the assurance that the project will not be canceled due to lack of financing.
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