Depending on the parameters and purpose of the project, the method of management, the nature of the investor’s fund and a number of other factors, real estate market practice has developed the following sources of financing a development project.
In the case of smaller residential developments aimed at meeting the housing needs of individual customers, developers often use their own financial capital. Such a solution allows for greater autonomy in operation, however, operating with own financial resources involves considerable risk.
An alternative to using one’s own financial resources is to seek external financing, i.e:
(i) an open housing escrow account makes it possible to finance the project from buyers’ contributions and reduces the interest costs on an investment loan,
(ii) a bank loan is a complicated procedure accompanied by a series of accompanying securities such as a mortgage,
(iii) cash loans are a solution similar to a bank loan, but less formalised (the money is committed by those interested in investing in the real estate sector),
(iv) participation of several investors in a special purpose vehicle – in practice, the participants in a project company are the developer and the investor, who in this way participates in the implemented investment and the corporate structure of the development company, e.g. as a limited partner in a partnership,
(v) crowfunding – an innovative solution on the Polish real estate market, consisting in a public search for smaller investors with the use of Internet platforms dedicated to this purpose through a public collection tool on a voluntary basis.
In practice, developers use several methods to finance investments simultaneously and at different stages of the project.
The presented solutions are only an exemplary range of solutions, which is an open catalogue, as developers are still looking for more beneficial financing methods.
*You are welcome to share your knowledge and experience with other solutions not covered here.
4 March 2023
