Undoubtedly, investing in large construction project financing requires large financial costs.

It may seem that experienced developers should have no problem with this.

However, in the face of a lack of funds, many companies are abandoning promising projects. To maintain financial liquidity and business activity, developers should consider applying for an investment loan.

In general, there are many options for financing construction projects. Most often, self-financing, attraction of external funds, or various combinations of external and internal sources are used.

• Self-financing of construction: net income, depreciation, sale of assets, tax savings as a result of investment incentives.

• Debt financing (for example, construction loans, non-bank loans, leasing, bonds), as well as issuing securities (issuing shares and raising venture capital).

When a unique investment opportunity appears on the market, and the company’s budget does not have sufficient financial resources to prepare an attractive proposal, it is worth turning to solutions such as investment loans and project finance.

More and more large companies in the construction industry decide to use investment loans for their projects. Today, developers are attracted primarily by speed, flexibility and a minimum of formalities. These advantages, combined with customized financing schemes, guarantee the success of the project. There are about 60 different financing methods described in the literature, which differ in many criteria and can be used for different projects.

The main dilemma for each developer at the stage of preparing an investment project is the choice of the most suitable organizational structure, which, in turn, determines the choice of the source of financing.

The role of project finance in the construction industry

To take full advantage of modern tools for financing construction projects, it is often necessary to create an independent business entity.

Its task will be to implement a specific investment project.

In addition to traditional and well-known forms of construction finance (loans, bonds, leasing), other less popular instruments such as project finance can also be used. They represent the financing of capital intensive projects through an independent entity.

A construction project can be carried out within an existing company that has worked with other construction projects, or it can be carried out by a so-called special purpose vehicle (SPV).

In the case of implementation of development projects, SPV shareholders usually act as sponsors. A sponsor is defined as an entity that provides an incentive to start implementing an investment project. Typically, a development company creates a special purpose vehicle, bringing in its technology, industry experience and other resources (for example, a land plot).

The long list of potential providers of capital for SPVs includes state and commercial banks, private lenders and other investors buying bonds issued by the project company.

Project finance is based on the assumption that the project itself and the assets obtained as a result of its implementation will be the main, and often the only, source of debt repayment and collateral.

The traditional method of analyzing the operating history and assessing the creditworthiness of the borrowing company is not used, since the SPV is a new legal entity that is created to implement a development project. In this case, the credit risk analysis relates to the investment project and not to the borrower.

There are two main approaches to financing construction projects, the non-recourse method and the limited recourse method.

A typical situation for a PF assumes the absence of any form of recourse to the borrower.

Due to the limited capacity of provision, capital providers are usually interested in joint project management, which allows them to monitor the work on an ongoing basis and minimize the risk of events that could negatively affect the project.

Large construction project financing using a non-recourse financing is a scheme whereby borrowers do not provide collateral.

The debt is fully repaid from the future cash flows of the project, and possible claims of creditors cannot be transferred to other activities of the initiator.

Most often this refers to investments in strategic infrastructure implemented on the basis of multilateral agreements on public-private partnerships (PPP).

Regardless of the field of activity, project finance today plays an important role in the implementation of large construction projects around the world.

At CP Finance UK, we are ready to provide clients with a full range of services, including financial modeling, legal advice, assistance in registering an SPV, raising funds on the most favorable terms, tax optimization, etc.

Alternative sources of funding large construction projects

Another way to raise funds for the implementation of construction projects is to issue corporate bonds of development companies.

Interest in this tool is growing every year, especially after the financial crisis. The attractiveness of bonds is due to their flexibility and efficiency in the use of funds. The developer’s collateral capital can be freely used for several years and even transferred between several projects, which is impossible in the case of a bank investment loan.

The funds received from the sale of bonds are used only to finance a specific project, be it a new project or refinancing of already started projects.

The funds raised from a developer’s bonds are an ideal example of bridge financing. They can be a valuable addition to loans. It should be noted that the success of bond financing directly depends on the credibility of the developer. Therefore, this method of financing is chosen by well-known companies that have achieved numerous successes and collaborate with recognizable brands.

Developers facing difficulties in obtaining an investment loan or unwilling to use traditional forms of project finance are increasingly choosing to finance new projects through alternative sources.

Growing requirements of banks and unfavorable conditions for granting loans are pushing entrepreneurs to search for them. In particular, many European firms are discouraged by the current parameters for LTV (loan amount versus collateral value) and LTC (loan amount versus total investment cost).

Supporting developers with non-bank private investments is becoming increasingly important.

Attracting private capital to large construction projects is a modern investment strategy that, although more expensive than a bank loan, allows you to finance complex and risky projects faster.

All negotiations take place directly with the investor, which contributes to the flexibility of the contractual relationship and reduces the time for making a decision.

Public financing of construction projects has great investment potential.

The so-called crowdfunding as a social investment tool is gaining supporters both among developers looking for an alternative source of funding and among investors.

Both sides of the project find each other through dedicated online real estate crowdfunding platforms. Each investor receives a share of the rental income of the property built, proportional to his invested capital, or the developer undertakes to repurchase the shares within a specified period.

Bank lending continues to be the most popular form of funding a large for construction project financing around the world.

But the economic downturn caused by the COVID-19 pandemic shows how problematic and risky it is for developers to rely on one tool to finance their operations.

The current difficulties in obtaining an investment loan have long prompted many investors to look for alternative sources of financing and their diversification.

The basis for the success of a construction project