Assignment Guidance from Tutor

How will the development be financed?

Read the study paper in week 10 and make study notes on the methods of development finance that are described.

In particular focus on:

• Project-based finance
• Equity

1. Forward funding
2. Joint venture
3. Lease and leaseback

• Debt – types/source

1. Bank project finance
2. Forward sale bridging finance
3. Mezzanine finance

You should also identify the advantages and disadvantages of each method of financing.

Now think about the following questions:

• Which of the methods outlined would be most suitable for an office development?
• Will a developer be likely to receive 100% funding from a source? If not, why not?
• What is the role of mezzanine finance?
• Which one is non-applicable? Why

Tips

• Try to connect funding options with the actual scheme in question.

• Do you know your GDV yet?
• Does 70% of that cover all your costs (GDC)?
• If so, the project which the entire costs can be debt funded.
• Therefore, the project finance may need some bridging, either split debt/equity (often a requirement of the mezzanine lender

• However, full debt funding for the mezzanine is unlikely for just that reason
• It is considered riskier as it is unsecured and is subordinate to the senior debt (the 70%) hence it of often termed a junior debt.

• A joint venture is really where two or more parties come together to make a project happen, i.e. take some hands on responsibility for and share the profit in a scheme; i.e. direct property investment and development.
• A bank is just a lender, not a project partner – providing the money makes them an indirect property investor.
• So you would only need an SPV to establish an off balance sheet legal entity to meet the development objectives with the JV partners.
• There’s a nice graphic at this link which might help;
• https://corporatefinanceinstitute.com/resources/knowledge/strategy/special-purpose-vehicle-spv/