In my 37 years in the development business, the subject of project financing is one that comes up all the time. The discussion invariably starts out with a few good points about what kinds of capital are out there and the better alternative capital structures yet seldom leads to any clear-cut consensus on what are the best project finance options. It’s usually a discussion that ends with “let’s circle back on this at another time”.
The challenge in figuring out the optimal capital direction is that in realty, project finance isn’t so simple. Finance is a complex area with a plethora of alternative capital sources, financing structures, deal points and other elements. Once you get past the usually smooth “getting to know you” introductory meeting with a new capital source, it takes a much deeper dive into the details. There are financing nuances, cost of capital, and salient factors that are involved in any one deal and even more work to compare multiple alternatives. Early misperceptions can lead to false deal starts, or down the road, having to live with worse deal terms that you’d like. On the positive side, securing large capacity adept capital sources and deriving optimal project appropriate capital structures is of supreme value to any development company.
Along with other major project elements, such as getting the anchor tenants on board and the property tied up, you should have the development team in place to design the project, process the entitlements and manage the construction. Capital is the fuel in the tank that gets the development race car going. Dialing in the right capital to suit the development program is powerful and as your developments get bigger and or more numerous, having solid capital sources lined up and ready to go is of paramount importance. A developer handling capital well is a bit like a miner handling nitroglycerin; it can help you blow through mountains and take you a long way down the track to the promised land.
Or, it could blow up the wrong way.
The 2009 GFC (Global Financial Collapse) set many capital developers aflame into the ash heap of history. The moral of the story is that as the project stakes rise, it becomes critical that the developer gets the capital partner selection and project financing structure right the first time.
Project Financing Solutions Part 2: The Wonderland of Sourcing & Structuring the Project Pipeline