Real Estate Builders and Developers

finbird supports builders and project developers in structuring financing solutions for the realization of commercial real estate construction projects.

Builders and Project Developers

finbird structures financing solutions for commercial or residential project developments for real estate developers, project developers and property investors. We work with a long-standing network of lenders, capital providers and equity investors to secure attractive terms for our clients that are tailored to the needs of each project. We work with both banks and alternative capital providers.

Information on Building Project Finance

Within commercial real estate finance, commercial project finance is a specialized area that focuses on providing the necessary financial resources for the development of new real estate projects. Obtaining these funds can be complex for project developers, as lenders, depending on market cycles and their own financing criteria, place different requirements on borrowers before project finance can be approved or paid out.

Basics of Project Financing Situations for Project Developers

The background to the stricter criteria is often particular uncertainties in project development, such as higher construction costs, extended approval periods by authorities or imponderables that arise during the construction phase. Because new construction projects involve significant risks, lenders and investors must consider various factors before approving financing. These typically include the feasibility of the project, the experience of the project developer, market demand for the constructed property and general economic conditions, such as the current interest rate market. Lenders and investors usually review the scope of the project based on detailed plans, cost calculations and planned budgets, as well as the time frames for completion.

Commercial mortgages are used for construction preparation, but primarily for the implementation of extensive building construction measures, whereby the release of funds is subject to strict disbursement conditions.
Bridge financing is generally used for short-term financing needs in large new construction projects. A bridge loan can be used for a purchase, for measures to prepare for building construction, but also to cover unexpected expenses in the project.
Financing prior to construction can include costs for the purchase of land or its development in advance of building projects or cover any costs that may be incurred to create building rights.

The valuation of the new building to be completed is of crucial importance for commercial project financing, as it determines the amount of funds required and the repayment of the capital borrowed from the expected income from the project. Lenders typically finance large new construction projects in tranches, with each tranche being released only after defined milestones along the verifiable construction progress have been reached. Developers and project managers can examine a variety of different financing options for their projects, and these projects are often structured with different lenders and sources of capital and financing products, e.g. through bank loans, equity, but also more complex instruments such as mezzanine financing or privately placed subordinated bonds. Each financing option has its advantages and disadvantages, and the choice depends largely on the size of the project, the duration of the construction work and market conditions.

Important Key Figures and Terms for Financing Commercial Building Projects

Loan-to-Value or Mortgage Lending Value (LTV) and Loan-to-Cost (LTC): Loan to Value (LTV) refers to the amount of the loan relative to the value of the property being constructed. For example, an LTV of 70 percent means that the lender finances 70 percent and the project developer 30 percent of the property value through equity or other sources of financing. The LTC refers to the amount of the loan relative to the construction costs. An LTC of 80 percent means that the lender finances 80 percent of the construction costs and the developer 20 percent. The LTC is important because it takes into account all project costs and provides a more comprehensive overview of the likelihood of additional financing being required due to cost variances along the construction phase.

Developer margin: The developer's margin is the potential profit for the project developer from the conclusion and complete sale of all units created in the building projects after deduction of all costs. For example, if the total project costs, including financing costs, amount to 10 million euros and the sales revenue is 12 million euros, the developer margin is 2 million euros or 20 percent of the total project costs. A healthy developer margin is important for both potential lenders and the project developer, in order to have a buffer for unexpected cost overruns during the construction phase.

Pre-sales rate: The pre-sales rate refers to the percentage of units sold from the building projects before the start of the construction phase. A common pre-sales rate required by lenders is around 30 percent of the total sales volume. This requirement serves to reduce the overall project risk by demonstrating strong market demand for the units to be built and gives lenders additional security through the income that is already flowing in before further funds are released for the construction phase.

Progress payments based on construction progress: The difference between a developer contract and an ordinary real estate purchase agreement for an existing property is that the purchased building or apartment is not yet completed. In this case, especially in consumer law, the legislator strikes a balance between the security needs of a buyer who does not want to pay the entire purchase price before completion and the project developer who has to finance the construction of the building. This is achieved through phased payments and installments. The legal basis for this is the German Makler- und Bauträgerverordnung. For example, funds are usually released and drawn down first for the purchase of the land, then for the completion of the foundations, the shell of the building, on completion of the main interior work and after final acceptance. This gives lenders control during the construction phase while still providing developers with structured access to liquidity.

Reference Cases

A project developer planned the construction of environmentally friendly and sustainably efficient apartments. The challenge in this project was the high purchase price for the property in a prime location and the necessary development measures before a building construction could begin. The financing was structured in two tranches: one for the purchase of the land and the development, which could be called upon with priority and gave the project developer enough time to prepare for the building construction phase.

A project developer planned to build a luxury condominium complex. The project faced high acquisition and construction costs, as well as regulatory hurdles at the project development site. The financing of the project was structured as a combination of a regular senior bank loan and a mezzanine financing tranche to supplement the project developer's equity. Once the necessary pre-sales rates were reached, the construction phase could begin.

A developer was planning to convert an old warehouse into a residential complex consisting of modern apartments. As construction progressed, it became clear that structural problems at the site would lead to increased costs and a need for additional liquidity. A bridge loan was arranged for the client to provide the necessary funds at short notice so that the project could continue without delay. The construction cost calculation included additional buffers for unforeseen developments, so that the total cost deviations were still within reasonable limits. The bridge loan, like the regular senior financing, was repaid as scheduled from the sale of the apartments.

FAQs

How is the feasibility of a commercial project financing assessed?

As part of an initial consultation and an evaluation of the project request, we assess the project's affordability by analyzing important factors such as location, potential buyer or tenant demand, the client's exit strategy, as well as the specific credentials and experience of the project developer. Further environmental and local zoning checks may be required by the client as the relationship progresses.

What are the typical credit terms for project development in new construction projects?

Depending on the complexity of the overall project, construction phases often last between 18 and 36 months from the start of construction. Financing is aligned with these construction phases depending on the client's exit strategy. As a rule, only short-term financing is desired for the sale of a new construction project, whether sold individually or en bloc. This financing is repaid when the project is sold. For building projects that a client wishes to incorporate into their portfolio, financing can also be set up from the outset with corresponding installment payments during the construction phases on a more long-term basis. The terms can therefore be designed in such a way that they can be flexibly adapted to the schedule and development goals of the project.

Is project financing available for the purchase of the land and for the construction phase?

Project financing can be provided in tranches, e.g. to cover the purchase of a building plot while the preparation of the building construction phase and the achievement of necessary pre-sales rates. Various possibilities and options are determined as part of an examination of the specific project financing.

What conditions should be expected for project financing?

Terms for project financing depend on the project risk, the rating and financial situation of the project developer, and the general economic conditions. However, terms for commercial project financing are generally higher than in the private customer segment.

Is additional collateral required for project financing?

Depending on their individual risk assessment of a proposed project, lenders may require additional guarantees or collateral from a project developer, over and above the property yet to be constructed. These may include personal guarantees, the provision of security in the form of other properties or assets, or additional equity.

What happens in the event of unexpected construction delays?

If construction delays or cost overruns occur during the course of construction, we work with our clients and lenders to ensure efficient communication between the parties in the project and to identify solutions to keep the project viable and on schedule.

When is bridge financing during the construction phase useful?

Bridge financing is a short-term loan used to close financing gaps caused by unplanned cost overruns or delays during a building project. It is usually used when funds that have been regularly applied for are not available due to unexpected events in an ongoing building project or to cover cost peaks.

Financing Process

Our advisory process for commercial project financing begins with an initial evaluation meeting, in which all relevant information about the planned building projects, the project developer's objectives, the project scope, the cost or developer calculation and the assumed potential returns of the project are exchanged. Important parameters such as the ratio of the amount of financing to the construction costs or the expected schedule for achieving the pre-sales rates in individual sales or the global sale by an investor give us a clear overview of the project. After the initial evaluation, we can quickly provide an initial indication of project financing and a possible financing structure, including various capital providers and products. On this basis, we then prepare a detailed advice for the project. In addition to the preparation, we support the approach of potential capital providers and accompany our clients throughout the process until the financing contracts are concluded.