How to get a Real Estate Project Finance?
January 06, 2023
Definition of Real Estate Project Finance
Real estate project finance involves providing capital to real estate projects. The cashflows in real estate project finance should be sufficient to cover the operating costs associated with a new project. The financing is based on debt and equity and is typically spread across the life span of an asset.
In real estate projects, a different method of financing is used at each step of the life cycle. The owner chooses the best course of action based on the project's stage. Depending on the risk involved, several financing mechanisms are used throughout the life cycle of a real estate project, from its inception to maturity. Equity is a preferable alternative in the early phases of the business as there are significant risks involved and getting a bank loan at this point is difficult.
The different instruments that can be used to fund a real estate project
A real estate project can be funded through several instruments. Each instrument has its own set of benefits and drawbacks. Funding for a real estate project comes from various sources like debt (non-convertible debentures, loans from banks/financial institutions, external commercial borrowings), equity (Family-offices, Institutional money, Foreign Direct Investment, etc.), asset class (Real Estate Investment Trust, Infrastructure Investment Trust), lease rental discounting. A few instruments of real estate project finance are discussed below:
- Debt: The forms of debt can be loans from banks, investments from PE/VC, or maybe syndicates.
- Non-convertible debentures: NDCs are used by companies for raising long-term capital; this is often done by a public issue. The investors associated with this kind of funding receive regular interest at a specific rate. These instruments have a fixed term, and according to the situation, they can be categorized into secured or unsecured debentures.
- External commercial borrowings: Funding through ECB entails several restrictions under the Foreign Exchange Management Act. Even though it’s restrictive, it is often a great tool to raise funds in bulk.
- Equity: Equity is technically the ownership of assets with some debt or liabilities attached to them.
- Foreign Direct Investment: FDI is an investment made by a foreign entity that purchases assets in the host country.
Key elements of real estate project finance
- Nature of the project - The nature of the project must be assessed to determine its feasibility and investment return and provide a general overview of the project’s budget and timeline; it is essential to assess the available resources and use them to the project’s advantage. Different project groupings include residential real estate projects (triple-deckers, duplexes, townhouses, quadplexes, etc.), commercial real estate projects (hotels, malls, educational buildings, shopping centres, etc.), industrial real estate projects (buildings for research, storage, production, etc.), land which includes vacant land, ranches, and working farms.
- Project management and risk allocation - Project management entails the development of practical plans, data collecting, effective designing, timely project evaluation, and so on. As every project involves numerous stakeholders for completion and a coordinated effort from all stakeholders, risk allocation is necessary to ensure a project's success. The primary goal is to prevent two of the project's most significant risks: time and cost overruns.
- Legal procedures - A legal due diligence examination seeks information about the company to ensure that the investment or purchase is advantageous. The process aims to uncover all relevant facts as well as any risks and obligations. After gathering and analyzing the data, an informed decision can be made. Typically, three forms of due diligence are performed in project finance:
- Due Diligence on Title
- Due Diligence on the Lender
- Due Diligence for Investors
The project's structure can be categorized into two sections:
- Commercial structuring in accordance with the client's objectives.
- Legal structure that supports certain legal objectives.
- Economic environment - Real estate prices frequently follow economic cycles, but investors can limit this risk by purchasing REIT (Real Estate Investment Trust) units or other diversified holdings that are either not related to economic cycles or can endure downturns. Government policies and regulations, such as tax breaks, deductions, and subsidies, can either increase or decrease demand for real estate. These economic and market-friendly settings have an impact not just on how a project is financed and also help decide whether the initiative is worthwhile in the first place.
Top Real Estate Financing Company
Resurgent India Ltd has a talented workforce of seasoned professionals who ensure a top-notch experience for firms looking for real estate project finance services. A SEBI-registered Category-I Merchant Banker, Resurgent India Ltd has a solid grasp of the industry dynamics, which enables them to deliver the best service to their clients.