Financing is one of the most important components for all construction projects. Due to its significant importance, financing shall always be looked into prior to commencement of the project. There are times that builders start the project with their own limited funds. The below list explains why this is an absolute recipe for disaster.
1. Attention to Project Details: A lender always looks into the details of the project before agreeing to provide financing. When a builder is careless in ensuring the completion of the project, this may be used to explain why they do not qualify for funding.
2. Financial Feasibility of Project: Depending on project type, there are times that kick starting the project is not financially feasible. What does this really mean? Well, project profitability could be highly affected once different variables are considered. This aspect is really dependent on the type, location, cost, and the uniqueness of the build.
3. Attention to Lenders Conditions in Advance: Arranging financing based on the type of project is a potentially time consuming task. If not thoroughly dealt with in advance, it could slow down or completely stop the project. There are times that lenders have conditions which need to be met (i.e. x percentage of pre-sales or leases in place) prior to final funding. As you may already know, Real Estate is a cyclical play, and not acting in a timely manner could lead to missing the right cycle. In addition, the clock is ticking on some of the other expenses that one has to pay irrespective of the cycle. The costs include insurance, property tax, and in some cases interest on your 1st mortgage. These added expenses are additional stressors that may impede keeping the project's cost overrun low and potential profit high.
4. Attention to Financing Structure: The structure of financing could have a major impact on project cash flow. This could lead to situations where an owner would be pressured financially and/or not be able to move the project forward due to lack of funds.
In order to stay on track with the construction process and mitigate the potential risks associated, it is vital that builders have a detailed budget outlining all soft and hard construction costs. A project timeline is also necessary when funding advances are required. This will help the builder determine whether the advance schedule presented in the lender agreement serves the project in a timely manner, thereby avoiding a project time delay.
As a summary, the overall success of the construction project is highly contingent to its proper financial planning; therefore it shall be dealt with prior to the commencement of the project.