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Project finance – advantages and challenges

Objavljeno 02.04.2021

The construction of residential and commercial properties is highly lucrative, and high demand for such space has encouraged many people to go into investment business. However, it’s no easy feat to obtain funds for such high-value projects that take long from the original idea to the realisation and collection. Investments are huge and it takes a lot of waiting to collect what you invested in – until the building is completed and the space is sold.

That is exactly why the banks have included in their offer project finance loans which are intended for investors and contractors.

Project finance is undoubtedly one of the most complex forms of lending – the invested funds are huge while the collection period is long.

An investor who opts for project finance definitely provides both himself and his buyers with multiple benefit:

  • Construction deadlines are much shorter, and it takes less time for the buyer to time to move in

  • Guarantee that the property will certainly be completed

  • Additionally, it will definitely be registered

  • There is no fear that at some construction stage there will be a lack of money for further works

  • The buyers do not run the risk of the investor failing to fulfil his obligations

However, becoming a bank’s eligible applicant for project finance is by no means easy and calls for a number of conditions and obligations. The bank must be 100% sure that it is entering a safe arrangement and project. That is why the road from the investor’s idea to the successful project completion and collection undergoes different stages!

To be able to set foot in the bank and apply for this form of financing in the first place, you need to take a series of not so simple steps – selection of the location, obtaining title documentation and review of urban-planning conditions, conceptual solution, location valuation and incorporation of the company for getting the funds.

But that is not all. The investor must obtain a construction permit, choose adequate contractors, negotiate the schedule of works, estimate costs and project profits.

This is when the time for the bank comes and for you to apply for project finance. The Bank will scrutinise every detail of the project in order to assess even the slightest risk possible and discover any potential project shortcomings that may result in potential losses. Nevertheless, it should not be perceived as a negative aspect of the whole project – in that manner the Bank not only takes care of itself but also points to the risks and omissions to the investor. Even if the investor implemented the project with his own funds, every omission might lead to undesired financial outcomes.

Who are project finance loans granted to?

- To investors and contractors who participate in the development of residential and commercial properties, in line with the Law on Planning and Construction.

- The project owner incorporates a new company, i.e., a Special Purpose Vehicle (SPV) which is the project holder and whose only activity would be based solely on project activities. The SPV applies for the loan, using the earned cash flows and revenues for loan repayment.

- The company’s property, among other things, becomes collateral under the loan.

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