Project Finance

Question 1

What are the main types of development finance, and their characteristics?

Answer 1

Two main methods of funding: Debt finance (lending from bank) Equity finance (JV or own money).
- Senior debt least risky (money back first) but lowest returns
- Common Equity most risky (money back last) but highest returns

——> Senior debt = first level of borrowing, takes precedence over secondary/mezzanine
——-> Mezzanine debt = additional funding above normal LTV lending
——-> Preferred Equity = like a bond. No voting rights
——-> Common Equity = like piece of company future growth. Voting rights

Question 2

What does appropriate cost control look like?

Answer 2

• Ensuring all parties clear on responsibilities
• Clear, traceable process for authorising costs
• Collaboration & Communication!

1. Clear budgeting and planning – establishing detailed and realistic budgets
2. Cost tracking and monitoring – Regular monitoring
3. Risk management – risk identification and mitigation (carried in outturn?)

Question 3

What cost control measures do you have in place?

Answer 3

1. I have £10k maximum to instruct changes if in budget
2. I send written request to the QS to confirm cost
3. If happy, I request the QS issues CAI to formalise instruction on Asite (to allow other consultants to review and incorporate)
4. Anything above must go through a director, or £250,000 and above is EXCO Committee.

Question 4

How does a prolonged programme lead to higher finance and insurance costs?

Answer 4

FINANCE
* Longer loan duration = ^ interest payments or even refinancing if fully utilised

INSURANCE
* Insurance extensions paid by developer – e.g CAR extension

Question 5

What do you use Construction Contingency for?

Answer 5

1. Unforeseen construction costs – Asbestos, design/scope changes (where appropriate)
2. Delays and extended timeframes – E.g Gateway 2 & BCSL on site, ^ labour costs

5-10% of total project cost

Question 6

What is the difference between equity and debt financing in a development project?

Answer 6

• Equity is the capital invested by the developer or investors in exchange for ownership or a share in the project’s profits.
  ——> It carries higher risk but provides higher returns.
• Debt is money borrowed from lenders (e.g., banks) that must be repaid with interest.
  ——> It is lower risk for the investor but doesn’t offer ownership or share in the profits.

Question 7

What is a loan-to-value (LTV) ratio and why is it important in development project finance?

Answer 7

• The ratio of the loan amount to the appraised value of the property or project.
• It helps lenders assess risk – a higher LTV means more risk for the lender as it suggests the borrower is putting up less of their own equity.

Question 8

What are the common risks associated with development project finance?

Answer 8

1. Construction risk (delays, cost overruns)
2. Market risk (changes in demand or prices)
3. Financing risk (difficulty in securing financing)

Question 9

What are the main components of a cost budget for a development project?

Answer 9

The main components include:
1. pre-construction costs (e.g., planning, legal fees),
2. construction costs (e.g., labor, materials, contractor fees),
3. financing costs (e.g., loan interest, arrangement fees)
4. post-construction costs (e.g., marketing, sales costs),
5. contingency funds (for unforeseen expenses).

Question 10

How do you distinguish between capital costs and operational costs in a development project?

Answer 10

• Capital costs are one-off expenses required to complete the project, such as land acquisition, construction, and design costs.
• Operational costs are ongoing expenses incurred once the project is in operation, including maintenance, utilities, staffing, and property management.