Construction Project Financing 101
Construction projects are incredibly expensive. Because of the hefty price tag associated with building new facilities, it is important to have a solid understanding of how to successfully finance the project. The available options for construction project financing will vary based on many different factors. For example, public projects can raise their funds through the use of tax receipts, general revenue bonds, or special bonds. This type of project can also benefit from grants from higher levels of government. For projects undertaken by a private corporation, the corporation must rely on its own earnings, find equity partners, issue bonds, or borrow funds from an alternative source. In any case, obtaining the necessary financing for a project is generally a lengthy and complicated process.
For private parties or corporations attempting to finance a construction project, there are various options to consider. The most preferable option would be to use corporate equity or saved earnings. With this method, the project would be completely funded by the private institution, and would not have to rely on any outside support. This is rarely a possibility however, because many parties do not have the massive funds readily available to finance a project on their own.
For parties who do not have the full funds available, the option of using a construction loan and long-term mortgage is commonly used. This method involves obtaining a short-term loan from a bank or alternative financial institution to cover the cost of the project. Once construction has been completed, another financial institution is brought in to provide mortgage or long-term funding for the building. A party can also use its own finances to support this method, thereby limiting the amount to be borrowed.
If the cost of the construction project financing is too overwhelming for the party to cover by either of these methods, it may be necessary to lease the building from a developer. By signing a contract to lease space through a developer, the developer becomes responsible for obtaining the funds to finance the project and arranging for construction. By financing the project through this method, the private party will still likely have influence over the design of the building, but will also be bound by the terms and conditions of the contract.
With the abundance of different options for construction project financing, careful consideration is necessary. Any party attempting to finance a project should take a close look at its available funds and the loan rates for any supporting financial institutions. There are many options to help with any construction project and researching these options will generate a more successful financial plan for any project.