Did the bank tell you NO! When you knocked on their door to finance a building project? Then you are not alone. Building projects are currently extremely difficult to finance. At least, by banks. So for smart funding you will need new partners!
New rules regarding bank reserves and lending require banks to hold on to their money. Both loans and mortgages for new and existing buildings must fulfill more and more conditions. Conditions around permanent employment contracts of the applicant, for example, and around minimum sales values at execution of the building at hand. This problem has led to interesting conversations and a lot of discussion topics during the joint workshop Smart Financing by BRIQS and Thomas Verhagen (Dialogues House) during the Reframe Housing Congress of April 15 in Eindhoven.
Fortunately, banks have far more to offer than just money and there are other ways to procure investments, but how do you unite these? Please read on because we like to share our experiences with smart financing of building projects with you.
What makes financing of building projects so complex?
If we look at building projects from the parties involved, their relationships, the rules and responsibilities, then we meet with a series of problems that make financing complex. Why? Because there are so many uncertainties. And especially financiers do not like uncertainties. For an overview, let us first sum up the problems. Further along you will read about how we can make things easier for all of us.
- Expectations regarding the costs of buildings are being transformed bit by bit in target and result contracts with the many suppliers of advice, control and execution. These contracts are the basis for funding. The final costs, however, cannot be completely vouched for in advance. It is a sum during the long lead time.
- Permits can only be issued after the completion of a lot of prepatory work in which local civil servants and politicians always play a role. These uncertainties in time and money disrupt pre-financing.
- Fragmentation of work by contractors, architects, installers, etcetera, yields loose components that come together only during work on site, and only then give the assurance that – combined – they will provide the required solution. Sometimes not until years after completion.
- Buildings only give certainty in advance when current and future needs of users are clear. Those demands are never completely known in advance and change continuously and increasingly fast. More than ever it is a matter practical experience for investor and end user alike.
- The current way of building is usually far from flexible. Adapting to changing needs of users is often difficult and costly. And the simple ways are usually unknown to the client, certainly to the general public.
Did you know? Funding is always based on three pillars!
There is reasoning behind these principle, so we give you the three basic pillars:
- Cash flow: the money that the applicant for the loan makes from the building by collecting rent or by other, already ongoing, activities, with which he can repay the loan.
- The risk exposure in the market: this has to do with the location and availability of the building for various functions.
- Certainties: the value of the property as collateral. When the applicant for the loan cannot completely repay the money owed, the bank can market the building. In that case it is important to have a current building with possibilities.
Apart from the hard collateral, trust is also in the softer issues such as a track record of the applicant and his behavior. Therefore, it helps if the applicant and the sponsor have known each other for a long time and have worked together before.
Now banks see only one ‘counterpart’
There is another stumbling block to overcome. When looking at building projects banks recognize only one ‘counterpart’. Banks only talk about financing with the ultimatedeveloper/owner/investor. The other project stakeholders, including users, consultants, architects, contractors, suppliers and manufacturers, are no party. Of course these parties do have their own personal or business relationship with the bank for internal credit loans on their part of the building project. The developer/owner/investor will pay all parties for their work during or immediately after completion of the project and then only continuous guarantees apply.
In the building industry the requesting party, that is the developer/owner/investor, provides the pre-financing. This is unlike other markets where the supplier offers financing in conjunction with the product. Think about car financing from the manufacturer or the payment of phones through the phone bills the following year. Ownership is also arranged differently in these markets. As a buyer you are the owner of the car or phone unless you have not paid, then ownership is undone. The real estate property law states that a building is automatically owned by the landowner. An unpaid supplier/manufacturer of that building cannot ‘take back’ the grounds because these were always the clients.
The four new roles for banks besides giving loans
The new rules regarding bank reserves and loans impede banks in making money available for building projects. The (#1) bank as money counter is therefore mostly closed. Fortunately, a bank has much more to offer than that. The vast knowledge, experience and networks banks up till now used internally to determine whether they could and should lend money, is very valuable to other parties who may want to invest. A bank is also an (#2) expert in the assessment of funding risks and on (#3) how to spread such risks. In addition, banks are an ideal (#4) information network and platform for knowledge and the distribution of the demand for loans from third parties. Furthermore, the bank’s position of (#5) trust has added value for the distribution of several products to third parties, including a range of new living or workspaces, when the bank acts as an ambassador for that added value.
Now banks need so much less manpower for the provision of loans, they have room to offer their internally hidden qualities to others. This is an excellent opportunity to get smart financing of building projects by third parties well organized, not by the bank but through the bank!
Smart financing of building projects can really be done without a bank
There are plenty of people and organizations with money who are willing to invest in a good building project. Think of parents who want to build a safe and independent home for their disabled children. Elderly people who do not intend to end up in a nursing home. Associations and local organizations that want to realize a futureproof accommodation for their target groups. Or municipalities as investors in good facilities for their inhabitants.
The building industry gets a chance to deliver a good product combined with the financing, as is common elsewhere in the economy. And because the building industry can directly influence the final value and quality of the collateral, the sector benefits even more from good performance. In addition, larger parties such as contractors, suppliers, manufacturers and raw material suppliers can place their assets, including related industry insurances and sector pensions, in a familiar market. Thus making the most of their knowledge and capital, now also for themselves in return on equity. Furthermore, even building parts now serveas collateral for producing parties. As manufacturers they know best what its (residual) value is and how the parts can be optimally re-used.
The solution lies in new combinations
So, three parties are involved in the solutions.
- First, a combination of the internal banking functions;
- Second, the developer/owner/investor of the project;
- Thirdly, the parties that want to participate, both from the area around the building as from its makers.
Methods such as crowd funding, credit unions and social impactbonds use those three markets to collect money. Often by publicly advertising the interests of others, think of the parents, the elderly, the institutions and municipalities mentioned. It is mostly about private and local money that is invested for financial returns plus the practical benefit that the lenders themselves have of the projects in the future.
If we also want to make funding possible from the prospective user as owner, it is important to split the base building from the fit-out. Then the fit-out can be financially, technically and organizationally funded separately, apart from the building inwhich the fit-out is placed later on. This is already commonplace in shops and restaurants. It should therefore also be possible in education, healthcare, offices or housing. In this setup, it is also logical to make a distinction between longer and shorter loans. This immediately creates a much wider market for money lenders.
What opportunities do you see to mobilize stakeholders and raise money for a project that you would like to realize? What are your ideas on how to convince interested parties to make available their money as a (temporary) investment so that the lenders ultimately serve their own interests? How do you see the role of the bank as a trusted partner for third parties in the analysis and spreading of risks leading to invested money repaid?
Take the next step and share your experiences
Do you want to take a next step? Come to the FREE* Masterclass. We will work with practical tools to instantly implement the actions of my ebook in your organizational, fiscal or financial projects and organization.
Join the conversation
Do you know how to build that new way and what you need? What opportunities do you see for banks in this way? Share it in the comments below.
To your health and wellbeing,
Remko Zuidema
