Recent legislation changes provide a transition to a new model of interaction between developers and equity holders – project financing of construction. The changes made make the bank a guarantee that home buyers will receive their square meters. And for developers, innovations have added several difficulties.
Developers will be able to continue to attract money from private investors, while you will make all payments according to the new scheme. You will not transfer investors’ money directly to the developers’ accounts but to a particular escrow account. In 2019, developers can work on the project using their credit or investment funds. In the latter case, investors lose and cannot withdraw the money invested in the task ahead of schedule.
In 2018, the market for new buildings was being transferred from equity to project financing. To approve the loan, the bank examines the project’s parameters for compliance with the established requirements. The developer has the right to use both own and credit funds for construction. While financing the construction, the bank controls expenses to exclude misuse of funds.
Project Financing of Housing Construction
Project financing is designed to provide the developer’s costs up to 85% of the project budget. The loan amount depends on the financing scheme and is determined based on the assessment results of the project’s financial model. The bank will offer various financing structures, considering the legal requirements applicable to the facility, depending on the date of the construction permit. Financing is possible for up to 8 years. The transition to project finance for construction has impacted accounting – working with escrow accounts differs from accounting for operations with ordinary bank accounts. The account is opened upon acquiring real estate, shares, services, and functions.
Project Finance Requirements
Construction project financing is intended to strengthen the existing real estate market, leaving only strong players in it. Smaller players are likely to leave the market as it is more difficult for them to get funding or credit. When trying to obtain permission to build an object within the framework of project financing, you must meet several requirements:
- According to the available project documentation, the company must have at least 10% of the total cost of the facility under construction.
- The developer must confirm the availability of the specified amount of funds in his current account. You must submit appropriate supporting documents and the project declaration to the territorial authority.
- The developer shall not issue any securities other than shares.
- The company must have no current delinquencies on targeted loans and credits.
- You must not use the developer’s property to fulfill obligations to third parties.
- The developer should not engage in other activities other than construction.
System Disadvantages
Despite the apparent advantages, the system has a significant drawback. So far, almost no one knows how to use it. The top reasons include:
- Poor financial and engineering design of the project
- An incomplete package of documents
- A lack of the developer’s capital
- A lack of reputation in the market
90% of regional developers have no experience attracting project financing or credit history. As a result, banks do not approve almost 40% of applications. It means that the developer cannot receive funds for implementing his project and either stops construction or builds according to the most budgetary scheme. This situation may significantly reduce construction volumes and increase housing prices, especially in the regions.
Mortgage
Now, mortgages in the field of individual housing construction are poorly developed. The share of mortgage transactions in this segment is less than 4%. You can get a traditional mortgage to purchase and construct private houses in several large banks. The main reasons for the low share of mortgages in individual housing construction are the high risks of building in progress, the difficulty of assessing collateral during the construction phase, and, as a result, the lack of a single loan product for such houses. Mortgages for the construction and purchase of a home you can issue today within the framework of several state programs.
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