Project Finance Flashcards
What are the main types of development finance, and their characteristics?
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
What does appropriate cost control look like?
- Ensuring all parties clear on responsibilities
- Clear, traceable process for authorising costs
- Collaboration & Communication!
- Clear budgeting and planning
- Regular cost tracking and monitoring
- Risk management
What cost control measures do you have in place?
ASITE
- I have £10k maximum to instruct changes if in budget
- I send written request to the QS to confirm cost
- If happy, I request the EA issues CAI to formalise instruction on Asite (to allow other consultants to review and incorporate)
- Anything above must go through a director, or £100,000 and above is EXCO Committee.
How does a prolonged programme lead to higher finance and insurance costs?
FINANCE
* Longer loan duration = ^ interest payments or even refinancing if fully utilised
INSURANCE
* Insurance extensions paid by developer – e.g CAR extension
What do you use Construction Contingency for?
- Unforeseen construction costs – Asbestos
- Delays and extended timeframes – E.g Gateway 2 & BCSL on site, ^ labour costs
5-10% of total project cost
It should be reserved for unforeseen circumstances and unexpected issues that could derail the project if not addressed.
NOT LICENSE TO BLOW BUDGET!
What is the difference between equity and debt financing in a development project?
-
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.
What is a loan-to-value (LTV) ratio and why is it important in development project finance?
- 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.
What are the common risks associated with development project finance?
- Construction risk (delays, cost overruns)
- Market risk (changes in demand or prices)
- Financing risk (difficulty in securing financing)
What are the main components of a cost budget for a development project?
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).
How do you distinguish between capital costs and operational costs in a development project?
- 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.
When would mezzanine lending be used?
Fills gap between debt and equity
Bridge Financing - when a company needs to secure a larger loan but a single lender is unwilling to provide the full amount.
E.g 20% above senior (60%) to get to 80% total LTV
What impact do economic factors have on a project’s finance?
- Interest rate ^ means costs more to borrow money (^ finance costs)
- Inflation = ^construction costs (materials)
What is the importance of appropriate cost control on a project?
- Mitigates risk
- If no cost control in place, can lead to instructions / changes which significantly impact the cost, and therefore profit of a scheme
- Appropriate cost control = trail of informtion
—> Request QS confirm cost of a change
—> QS confirms cost
—> If happy, request EA raises CAI
= Confirmed
What does sensible budgeting look like?
- Get internal and external QS to value work packages
- If project = risky, put in ^ contingency
What are your roles / responsibilities with regard to budget and cost
- Control budgets and report monthly
—> inc. movements - Approve CRFs and Request CAIs
Why did you record client scope changes as increases to both adjusted budget and outturn,
BUT… precurement and trade package gains / losses as increase to outturn only?
- Both to outturn as was crystalising a cost that would be spent
- However, when the client requested scope changes, they simoultaneously signed off increased budget to fund this
What are the key cost items on a development?
Construction Costs
Land Acq
S106 / CIL/MCIL
Dev Contingency (5-10%)
When should contingency not be used?
Regularly planned costs,
minor scope adjustments,
or to compensate for poor project planning or underestimation of work.
—> It should be reserved for unforeseen circumstances and unexpected issues that could derail the project if not addressed.
Crucial to avoid using it as a license to exceed the budget
