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The
construction phase project financing is typically the third rung in the
capitalization ladder that must be "climbed" by the project
developer that includes the pre-development phase, pre-construction
phase, construction phase and post-construction phase project financing
proposal. RMC routinely provides the due diligence consulting
services and commercial real estate advisory services that make a
construction phase project financing just a bit easier on the
stressed-out developer who can't figure out why institutional investors
aren't flocking to his/her side.
The
reality is that there are some issues that must be dealt with by the
developer that institutional investors demand as a condition precedent
to the institutional investor's participation.
What
activities are not typically financed by institutional investors?
Hereinbelow
we group them into broad categories:
-
Zoning.
In almost all cases, institutional investors will automatically
reject any project funding proposal that involves a zoning fight.
Costs for obtaining zoning and permitting necessary to allow
construction to begin are viewed as critical path items by
institutional investors.
-
Environmental.
If the project proposal requires more than the filing of a complete
Environmental Phase I study, the institutional investor will require
the developer/sponsor to fund the costs associated with
environmental reviews and remediation expenses.
-
Site
Control. Site control is a fundamental requirement for
institutional investor consideration. If you don't have
control of the site, you don't have control of your transaction and
institutional investors will drop the proposal without further
consideration.
-
Market
Feasibility. The project must have an arm's length market
feasibility study that
substantiates the proposed project and institutional investors will
not fund these costs in a typical transaction.
-
Financial
Feasibility. The developer/sponsor group is typically required
to complete a pro
forma financial presentation regarding the project's anticipated
operating and non-operating cash flows. Obviously, it would be
very difficult for anyone to judge the merits of a transaction that
has no financial feasibility underpinnings.
-
Business
Plan. The developer/sponsor must have a strategic
business plan that clearly demonstrates the efficacy of the
proposed scope of operations and the ability of the
developer/sponsor to provide management and reporting
transparency. Institutional investors will demand to see the
strategic business plan as a condition precedent to serious
investment consideration.
So,
what should be in your plan?
Your
development program financing should address the following "deal
points":
-
Credible
Project Team: don't leave home without one. Transactions don't
make money, sound business/enterprise management is what makes
money. Each area of ongoing endeavor must have a credible
person or company managing the associated risks for the benefit of
investors.
-
Credible
Due Diligence: don't assume that all risks are going to be absorbed
by the institutional investors as a condition precedent that does
not need to be substantiated. Know the risks. Do your due
diligence and demonstrate the findings.
-
Funding
Proposal: the funding proposal must be realistic and include
necessary reserves allocations, an order of funding and an order of
retirement that demonstrates the ready availability of all funding
elements.
Learn
more and stay focused. The biggest issue RMC encounters is a
fragmented effort as the developer demands that each potential financing
source be solicited. This frequently leads only to longer delays
in the financing process. Get a plan, document it and then run
with it.
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