Financing of Real Estate Projects

Author: Anthony Arquin

Mixed-use real estate development projects are becoming increasingly complex; when developing their legal and operational structure, one therefore has to take financing of the various aspects into account from the get go. The challenges to be considered include, in particular, the holding structure, the subdivision of the property according to use, and the interaction between the lenders, in particular if the owners or lenders differ for each use. Whether during the due diligence process or when preparing the development plans, developers must consider each aspect from a lender’s point of view. Financial partners may worry about certain legal or business risks, even though they may be acceptable to the developer, such as minor irregularities in the title to the property or certain environmental issues.

Even when a real estate development project is held by a single purpose entity or a limited partnership in order to limit the developer’s legal liability, developers and their partners must be prepared to financially support their project towards the lenders. One of the critical discussions in any financing will be about guarantees and penalties during the development period until project stabilization.

For example, affiliates and sometimes executives may be asked to give different types of guarantees: general security (whether or not capped), guarantee to service the debt during construction, performance bond, cost overrun guarantee, environmental indemnity, bad boy indemnity, etc.

If the development manager is an affiliate of the borrower, the lender may ask for the right to terminate the management contract in case of loan default, thus jeopardizing the underlying fees for the developer. In short, the challenges related to the financing of mixed-use real estate development projects are as diverse as the projects themselves.

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