Obtaining funding for construction and development projects in the current lending environment can be tricky. It pays to be aware of the range of funding providers on offer and how they differentiate themselves in terms of pricing and terms.

Issues around the bankability of projects are increasingly important in ensuring that the funding for your project goes without a hitch and doesn’t get bogged down in a bank’s credit department or fall over at the investment committee stage.

ESG issues are also playing a role in determining which projects receive funding and at what pricing.

A. Funding Providers

Development and construction funding can be provided for your project by the traditional bank lenders or by a range of alternative funding providers in the ‘non-bank’ market.

The table below considers the key considerations in terms of which funding provider may be most suited to you and your project.

B. Bankability Issues

The bankability of a project or otherwise can ‘make or break’ its funding.

We consider several key issues below which any developer should be alive to long before approaching any possible funding provider.

Structuring

• it is really important to get your structuring right, even prior to land acquisition. Transferring the title to your land to another entity following acquisition can be a costly exercise
• structuring can also help to facilitate the provision of security, for example, share or unit security over the developer SPV, by the interposing of a ‘holdco SPV’ between the Sponsors and the developer SPV
• structuring can also assist with the raising of additional debt to plug any equity gaps; the interposing of additional entities between the Sponsors and the developer SPV may enable entities higher up the chain to raise subordinated or preferred equity debt which does not need to share in the security at the development level

Titling

• where obtaining funding with respect to a project where the title will be a long term ground lease, be aware that the lenders will focus long and hard on the terms of the ground lease, and a ground lease with termination rights going beyond failure to pay the ground rent and insolvency of the tenant may be difficult to fund

AFL & Presales

• potential funders will look at sunset dates contained in Agreements for Lease and in presales contracts both in terms of any key milestone dates and sunset dates for Practical Completion. You should ensure that there is a sufficient buffer and flexibility built into the development programme such that these key dates don’t raise any concerns for the funder
• be open to the possibility of tripartites with sole tenants or key anchor tenants and build a requirement into the AFL that the tenant will act reasonably in negotiating and agreeing the terms of a tripartite
• funders will also consider other termination rights under AFLs and presale documentation and the ability to assign and transfer the rights under those ‘takeout’ documents to a replacement developer in the event of an insolvency. You should aim to keep termination rights to a minimum and ensure maximum flexibility on assignment

C. The impact of ESG

Both traditional lenders and non-bank lenders are having regard to ESG issues when considering whether or not to fund projects and at what price. Examples of the relevant issues are:

Environmental

• Use of renewable energy resources
• Waste management and recycling
• Management of water use and air pollution

Social

• Treatment of employees
• Diversity and inclusion policies in the workforce
• Supply chain issues

Governance

• how well does management address the interests of stakeholders

For traditional banks, sustainability issues and the impact of ESG in relation to a particular project is considered internally by the bank’s ESG function and ESG issues in the funding of projects is a focus in terms of reporting to the board and to the banks’ shareholders.

Non-bank lenders will have their own ESG targets which will be heavily influenced by their investors, whether the investors are pension funds with their own ESG reporting and targets, or high net worth individuals who may have a particular interest in ESG-related issues.

For a long time ESG was seen as a pricing issue, but it is now increasingly becoming an availability of capital issue. However, it will be interesting to see how this evolves over the near term given the impending change of government in the US and the evolving political climate in the EU.

In summary

To ensure the smooth funding of your project it pays to take some time initially to consider bankability issues including structuring and ESG, and to be aware of the different funding options available.

Being prepared to deal with issues upfront and at an early stage and to take time to test the market for the best structure and pricing for you can pay real dividends when it comes to putting your funding package together.