23.03.2018

Alternatives for financing real estate projects

Most real estate projects use at least one form of debt or equity to finance them.

Most real estate projects use at least one form of debt or equity to finance them.

 

Thus, to start our projects we have a series of alternatives to which we can resort individually or as a whole. Let’s explore the main ones below.

Bank Credit

This is traditionally the most commonly used source. The amount of the loan is based on the total cost of the project, which is known as the loan to value. Depending on the type, size and risk, the bank may ask for a higher capital contribution by the partners of the same or certain levels of pre-sales. About 20 to 30 percent of the total value of the equity investment is usually required in order to take on a bank loan.

Seed capital

 

As with other business lines, this modality occurs in its initial stage and conceptualization and is usually the most expensive because of the risk involved. To capture the attention of angel investors, the project plan must be sufficiently grounded and must have passed legal, economic and market feasibility analysis. Commonly, those who contribute are trusted friends or relatives of the developer.

 

Private capital

 

Given the complication of raising money from individual sources, many developers prefer private funds. These usually inject temporary capital in exchange for participation. Entities that do so often seek control over project decisions and request that the management team (developer) align their interests with variable incentive schemes based on results, as they want to maximize their profits at all times.

 

Public funds

 

This financing may proceed in several ways: on the one hand, foreign companies, usually institutional capital companies, financial or insurance entities, that invest in projects and portfolios with long-term horizons; on the other hand, instruments such as infrastructure trusts and real estate (Fibra), similar to the REITs in the USA. Frequently, these trusts opt for already stabilized real estate with a high occupancy rate and long term operating flows. There are also development capital certificates (CKDs), which integrate resources from different investors, especially pension funds (Afores).

 

Suppliers

 

A recurring source is the exchange of investment for labor, materials, or a combination of both. This requires clarity with the different actors, specifications and rules in the contract. Not having a good agreement can lead to serious problems in the execution of the project, both in terms of time and the quality of the work or materials used.

Crowdfunding

This new trend makes it simple to massively promote business opportunities and access a broad base of prospects (friends, family, colleagues and unknown enthusiasts) through social media, websites and other digital platforms. It brings together a significant number of common investors and attractive investment tickets with a model that connects three main actors: the entrepreneur, the investors, and the site that facilitates the transaction.

 

As we have seen, today’s entrepreneurs and investors have access to greater possibilities to partner and manage their resources. The former are motivated to implement their ideas with a more generous portfolio of financial sources, and at the same time these sources have been democratized: they come from the big capitalists and bankers as well as from the ordinary citizen.

 

Choosing the best form or mix of financing will depend, among other factors, on the objectives and risk tolerance of each project.

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