The financing of development and construction has evolved since the global financial crisis. Prior to the economic crash in 2007, the main source if funding was provided for through banks. This funding was provided for at an early stage, and for some time was provided on the understanding that the asset value was going to increase only. Since then the funding model has varied greatly. Although lending institutions have begun lending again, there lending is far more restricted and averages in or around 50-65% of development costs. Less funding is provided for in relation to site acquisition which might not yet have the requisite planning or consents.
Non-equity funding now provides a major role in project finance. Non-equity funding is essentially non-bank finance. They include hedge funds, private equity investors, insurance companies, etc. There addition to the market has provided new avenues in which to obtain finance, and also the type of finance which can be obtained- Mezzanine Finance: a hybrid of debt and equity financing that gives the lender the right to convert to an equity interest in the company in case of default/ A non-amortizing loan: a type of loan in which payments on the principal are not made until a lump sum is required.
The benefits of this new type of project finance is the flexibility which it provides to all parties. It is usually based on commercial terms which will allow the asset to reach its main objective and thereby ensuring that all parties benefit. Banks are also more risk adverse when it comes to investment, whereas Private investors are also more aggressive in viewing the profit lines in an investment. This will allow for riskier transactions to obtain funding.