Commercial Real Estate Development Project Financing - Phasing Defined

Pre-Development Phase Funding.  The pre-development phase commences with the completion of the market study, financial study, zoning/permitting review, environmental review and obtaining site control for the proposed project.  The funding for these activities is typically the burden of the developer/sponsor group exclusively.  Institutional investors view the pre-development phase funding as being strictly the problem for the developer to fund.

Pre-Construction Phase Funding.  The pre-construction phase commences with the designing of the proposed project and includes all architectural and engineering studies required to reach a price-lock for the construction of the proposed project.  In most cases, institutional investors will not fund these activities, so you must be prepared to at least fund the design and related elements through the completion of Schematic Phase design and construction specifications.

Construction Phase Funding.  Here's where the institutional investor will jump into the transaction and provide construction financing and/or equity/preferred equity financing for your project provided you have all necessary studies and third-party reports required for closing on the construction loan and commencing development.  Risk management is the big issue here so don't ignore it or you will just end up getting rejection after rejection.

Permanent Capital Funding.  The permanent capital funding plan usually consists of a permanent mortgage.  However; where earnings can be quickly stabilized above plan targets, the permanent capital funding plan approach allows for some profit-taking that can be used to buy out preferred class investors and/or provide some level of cashing out the sponsor/developer's equity position in the transaction.  Accordingly, this shouldn't be assumed to be just a mini-perm or perm loan.  Sometimes it is better to seek a construction loan that has a longer term so that the permanent project mortgage can be sized to help make the development that much better - "mo' betta'" is the outlook.