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Project financing is typically not the direct concern of the architect/engineer or the cost engineer. It is usually the owner or developer's responsibility to secure both the short-term construction loan and the long-term loan. However, it is essential that the architect/engineer understands the various phases of project financing and how cost information will be utilized and evaluated in the financing decision, as well as in the project financial analysis requirements of the lender and the owner. The focus of this article will be projects financed by commercial banks, such as: office buildings, retail malls, hotels, multifamily housing, and business expansion of production or warehouse facilities, etc. Public and municipal project financing for highway, sewer, street, and bridge improvements, and other infrastructure projects will be briefly discussed. Finally, a summary of project financing used by foreign countries on international projects will be presented.
THE FINANCING PROCESS
Banking and securities laws in the United States are unique compared to European countries, Japan, the Pacific Rim, and Middle East countries. US lenders typically cannot take an equity position in a project. Furthermore, the short-term or construction loan is normally provided by a commercial bank or on residential loans by a savings and loan association. The long-term or mortgage loan is typically provided by insurance companies, pension and trust funds, or by government-sponsored agencies and secondary sources such as Fannie Mae on multifamily residential loans. In contrast, a foreign project owner may be a trading company that also owns the bank, providing both short-term and long-term financing on the project. A lender may be a merchant's bank that has provided project financing--nonrecourse debt where the only recourse is the project's assets and the project's cash flow.
Few US projects are paid for from funds that the owner or developer has already accrued. The owner must find someone willing to loan the money to make the project possible. In order to find someone who has enough faith in the project, the owner must prepare a complete analysis of all aspects of the project for the lender's review. Reliable cost estimates are necessary as the construction costs are the major expense side of the proforma. Interest and land costs are the other significant cost components. The owner will likely have to...