The institutional arrangements utilized to finance your construction projects depend largely on the type of owner contracting the project and the type of structure or facility being built. Without a clear understanding of these vital distinctions, the profitability of your project could decrease and the viability of your project could be called into question.
In part one, the Miami construction attorneys at Cotney Construction Law introduced institutional arrangements for financing construction projects using two examples: municipal projects and projects financed by private corporations. Now, we will discuss the unique financing arrangements for real estate rental properties and public projects.
Real Estate Rental Properties
Real estate rental property projects, like projects spearheaded by private corporations, are funded by pension funds, insurance companies, investment trusts, commercial banks, and others. However, they can also be financed by quasi-governmental corporations like urban development authorities. Real estate investment trusts (REITs), domestic pension funds, and foreign pension funds are examples of syndicators representing new arrivals in the financial market for building mortgage money.
Common sources of funding for public projects include tax receipts, general revenue bonds, or special bonds with income committed to the construction project. Whereas general revenue bonds need to be repaid from general taxes or other sources of revenue, special bonds can be redeemed through special taxes or by collecting user fees for the project. In addition, public projects benefit from grants issued by higher levels of the government. These grants are a principal source of funds for state, county, city, and other local agencies.
The Cost of Borrowing Money
Although there is an array of sources for borrowing funds, the cost of borrowing money is surprisingly uniform for particular types of projects. Lenders have the ability to take part in a diverse lineup of financial markets, which affords them the liberty to pursue loans with the highest potential yield on return for a particular level of risk. As a result, any funds you need to borrow can be obtained from a variety of sources without vast cost differences in interest charges and issuing costs.
Typically, the cost of borrowed funds is generated as an inverse to the risk of a loan. Since lenders require security on loans — often utilizing a tangible asset — the borrower must repay the loan or the lender can legally take possession of the loan security. If the lender cannot ascertain the value of the tangible asset used as security for the loan, they will demand a greater return and charge you higher interest payments.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.