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									Training Sessions
  October 2005
Financing the Development

      Training Seminar
        October 2005
        Sources of Finance
• Additional finance from business owners
• Generate finance internally from
  generating and retaining profits
• Borrow.
Finance - Commercial Sources
• Debt Finance (borrowed)
  – Short term loans
  – Bank project finance
  – Mortgages
  – Mezzanine finance.
       Sources of Borrowing
• Bank, building society or similar
• The capital market
• The client
• A partner
   Advantages of debt finance
• Transfer of risk to lender (at a price)
• Interest is an allowable expense for tax
• Competition between lenders decreases
• Flexibility – drawdown and repayment
  terms negotiated to suit developer’s
  requirements; interest may often be
  ‘rolled up’ until end of project.
• Non-recourse finance – no recourse by
  banks to assets of borrower by bank in
  event of failure
• Limited recourse finance – developer
  may guarantee interest payments but not
  capital repayment
• Full recourse finance – secured entirely
  on corporate assets.
              Four ‘Cs’
Banks look at:
1. Character of borrower
2. Cash stake
3. Capability
4. Collateral.
         Preferred projects
• Excellent location
• Pre-let or pre-sold
• Leased to ‘blue-chip’ tenant
• Leased for at least 10 year term
• 5 yearly rent reviews
   Funding Requirements
           Example question
Discuss the matters a funder would require to be
satisfied in respect of a speculative scheme for a
new mixed office, retail and residential
development totalling 90,000m².
Comments on funding question
   Consider such matters as:
    – experience/track record of developer
    – tenant demand
    – purchaser demand
    – suitable location for such a development
    – timing of outgoings and cash inflows
    – possibility of prelets of shops and offices or conversely
      void periods, and forward sales of residential units
    – possibility of phased development
    – construction costs and timing
    – potential profit and timing of profit
Finance - Commercial Sources
• Equity finance (own source)
   – Cash
   – Share issue
   – Retained profit
   – Debentures.
  Advantages of equity finance
• Developer controls project without having to
  consider bank’s requirements
• Cheap to raise
• Not dependant upon project, so does not have
  to be repaid and re-negotiated for each scheme
• Flexibility – developer can slow down, speed up
  or change project without having to get bank’s
Finance - Commercial Sources

  – Joint Venture
  – Forward Sale
  – Building Lease.
Advantages of these other
Finance - Government Sources
• Crown Scheme

• To exploit the skills and knowledge of private
  sector firms
• To reduce the total life-cycle costs of assets
• To convert public sector capital expenditure
  into service payments over an extended periods
• To transfer certain risks to the private sector
  (which is better equipped at analysing and
  managing them).
       Procurement Options
• BOT – build, operate, transfer
• BOO – build own operate
• DBFO – design, build, finance, operate
• DCMF – design, construct, manage,
Examples of funding methods
Ground Rents
             Ground Rents
• There are two main methods of
  assessing ground rents:
  – As a percentage of site value
  – As a site rent equal to the rack rental of
    buildings less annual equivalent of costs
• Lease length usually 125 or 99 years
  with reviews every 5 to 25 years.
Risks and their reduction
      Example question R1
You represent a developer who has been
offered the site of a former cotton mill, which he
proposes to refurbish as a residential scheme
comprising 60 flats. The site is adjacent to an
overgrown, disused canal that the council is
proposing to clean and reopen as a tourist
Prepare a draft report to your client, setting out
and explaining the principle risks, differentiating
between the site risks and the development
risks, and how these might be reduced.
Comments on example question
To be set out in report form (draft) explain the
principle risks:
Site Risks: eg contamination, access, water
problems from canal, issues covering canal
as a tourist attraction;
Development Risks: eg funding, letting and
selling periods, construction costs,
construction period, planning (listed building,
permission, provision of affordable housing
     The College of Estate

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