Whitepaper
Financing real estate and developments
Capital structure from senior to equity, covenants, security and the documents lenders actually read.
The debt market has sorted itself out. On developments, banks rarely go beyond 60 to 65 per cent of total cost, ask for more pre-letting and scrutinise the track record more closely than five years ago. Junior capital fills the gap – at a price that has to work.
This paper describes how a structure is built, which metrics decide it and which documents a lender genuinely reads.
The capital stack
At the bottom sits senior debt with a first-ranking charge, cheap, with the tightest covenants. Above it mezzanine or junior debt, more expensive, more flexible, often unsecured. At the top equity or a joint venture partner sharing risk and upside.
A whole loan bundles senior and junior with one lender. That saves negotiation time and the intercreditor agreement but costs more on a blended basis than a well negotiated two-tier structure. Under time pressure it is often still the right call.
- Senior debt: 55 – 65 % LTC on development, up to 70 % LTV on standing assets
- Mezzanine: closes up to roughly 85 – 90 % LTC, current pay or with a PIK element
- Whole loan: one contract structure, one counterparty, higher blended rate
- Bridge: short term, for acquisitions, planning permission or refinancing gaps
- Equity / JV: the most expensive capital, but the only real risk buffer
Which instrument fits when
Standing asset with stable cash flow and bankability: senior, possibly with a small mezzanine slice to optimise return on equity. Development before planning permission: equity or bridge, because no conventional lender funds without consent.
Development with permission and pre-letting: senior plus mezzanine, often as a forward structure with an institutional end buyer. Special situations under time pressure: whole loan or bridge, then refinance into a cheaper structure.
The metrics that decide
Every lender runs the same four or five numbers – and if one of them is out of line, no presentation helps. More important than the ideal value is that you can explain the deviation.
- LTC / LTV: leverage against cost or market value
- DSCR and ICR: debt service cover from operating cash flow
- Exit yield and sale assumption: where most models turn optimistic
- Construction cost buffer: below 5 per cent it gets tight in every variation discussion
- Pre-letting or pre-sale ratio as a drawdown condition
Development: build progress and cost control
On developments nobody pays out in one go. Drawdowns run against build progress, confirmed by a progress report or an independent monitor. Underestimate this process and you have a liquidity problem mid-construction even though the financing is in place.
In practice: the contractor's payment schedule, the bank's drawdown rhythm and your own cash plan have to match. Realistically, two to four weeks pass between request and receipt – that lead time belongs in the plan.
- Plan for the progress report as a drawdown condition
- Align the construction contract and the loan agreement on deadlines
- Set variation management early, including approval thresholds
- Price completion guarantees and bonds realistically
Covenants and security
The loan agreement matters more than the interest rate. A cheap coupon with tight covenants can trigger a default in a weak quarter, while 60 basis points more with room in the covenants carries the project through the cycle.
So we negotiate covenants, cure rights and distribution locks first – and price second. In two-tier structures the intercreditor agreement is the time-critical path; it should start alongside the term sheet, not after it.
- Give financial covenants cure periods and equity cure rights
- Check distribution locks: they decide when you see money
- Negotiate subordination and standstill alongside the senior lender
- Model prepayment penalties and exit fees before signing
What lenders really read
Not the glossy deck. The model, the track record and the question of who injects capital if things go wrong.
- Project model as an open file, not a PDF extract
- Sponsor track record with completed, comparable projects
- Construction and permitting status with dates and evidence
- Tenant or pre-sale position with contracts, not letters of intent
- Shareholder structure and creditworthiness behind any funding obligation
Timeline to first drawdown
Realistic orientation for a structured financing of medium complexity.
- Day 1 – 2: key data, first indicative range
- Week 1 – 2: complete documents, preparation, lender list
- Week 3 – 5: approach, questions, indicative term sheets
- Week 5 – 8: selection, credit committee, valuation and surveys
- Week 9 – 12: documentation, security, first drawdown
In short
The structure decides, not the coupon. Think covenants, drawdown conditions and build progress through together beforehand and you finance more cheaply – and far more safely.
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