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Real Estate Project Finance

Different types of funding for a real estate development project

What is Real Estate Project Finance?

Project finance is a long-term financing of an independent capital investment, which are projects with cash flows and assets that can be distinctly isolated.  Real estate project finance is a classic example.  Other examples of project finance include mining, oil and gas, and buildings and constructions.


Real Estate Project Finance theme


Project cash flows should be sufficient to cover its operating expenses and to fund the financing repayment requirements because it is a standalone entity. Typically, the financing is made up of debt and equity matched to the lifespan of the asset.


Project Finance vs Corporate Finance

When a corporation takes on a new investment, it can use cash flows from other operating activities to fund the new project.  It can also use its general creditworthiness to borrow money and fund the project without isolating the project.  The corporation might also issue equity with an indefinite time horizon.  In project finance, equity used to fund the project are usually repaid at the end of a specific time horizon.


Capital Stack in Real Estate Project Finance

When it comes to funding project finance, the capital stack includes several considerations:

  • Draws on construction loans for a real estate project finance
  • Security and priority for other lenders in the capital stack
  • Term that matches the length of time it takes to develop and sell the project
  • Trade-offs between fixed and floating interest rate
  • Pricing around the equity


The capital stack typically comprises the following:

  • Senior debt
  • Subordinated debt
  • Equity

Senior debt is the most secured capital, while equity is the riskiest out of the three.


Real Estate Industry Terms and Definitions

To build a financial model, we need to understand the important terms and definitions frequently used in the real estate industry:

  • Loan to value (LTV): The amount of debt financing a lender will provide as a percent of the market value.
  • Loan to cost (LTC): The amount of debt financing a lender will provide as a percent of the cost of a development.
  • Net operating income (NOI): Gross rental revenue less operating expenses (property taxes, insurance, maintenance, etc.).
  • Cap rate: NOI divided by the value of the property expressed as a percentage.
  • Amortization period: The number of periods (months or years) the principal repayments of a loan take to be completed.
  • Term: The length of time that the interest rate on the mortgage is agreed for.
  • General partner (GP): An owner of a partnership with an unlimited liability and is usually a manager who actively participates in the operations and can earn a promotion.
  • Limited partner (LP): A passive investor who has limited ability based on the amount he invested in the development.
  • Land loan: Financing used to acquire a piece of land with no NOI. The long-term value will be much lower than an income producing property.
  • Floor space ratio (FSR): Used to determine the size of a building and control the density of development on a parcel of land.
  • Gross building area (GBA): The sum of all building spaces from wall to wall.
  • Gross leasable area (GLA): The sum of all enclosed livable space.
  • Gross site area: The two-dimensional measures of a site based on its property lines.
  • Deductions: A portion of the gross site area that cannot be built on, such as public access, roads, lanes, etc.
  • Net site area: The gross site area less any deductions.
  • Max GBA: The gross building area calculated based on the FSR.
  • Construction GBA: The gross building area based on construction plans.
  • Saleable area: The gross building area based on construction less all common spaces or other non-salable areas.


Development Timeline

Understanding the development process and timeline helps us get a clear map when building a real estate financial model.  There are several stages in a real estate development project:


Project Finance


Different types of funding are used at each stage of the life cycle of a real estate development project.  For example, a company uses equity to finance the sourcing of deals since there is high risk in the early stage and it is hard to obtain bank loans.  In the later stages such as acquiring land, rezoning and pre-development, the projects are usually financed with both loan and equity.


Real Estate Financial Model & Valuation

Below is a screenshot from CFI’s Real Estate Financial Modeling Course, where you will learn how to build a development model from scratch in Excel with step-by-step instruction.


Real Estate Project Finance Model


More Resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To help you advance your career, check out the additional resources below:

  • Due Diligence in Project Finance
  • Financial Modeling Best Practices
  • Project Budget Template
  • Real Estate Joint Venture

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