FINANCING IN REAL ESTATE

Advocate S Selvakumar|Property advocates in Bangalore|Property lawyers in Bangalore

Real estate business is an immensely profitable business, but it necessarily involves considerable amounts of money. When it is planned to raise real estate financing, it is important to know at what stage of development the project in question is. Financiers are quite well conscious of the fact that the intermediary phase calls for the maximum possible amount of required funding. They will naturally be anxious to know for what the funds will be used.

The financier is very much particular about the strength of the management team, because management is a critical element assessed by lenders. Financiers will wish to see the business plan also. This means that the estimated project costs need to be projected for at least the first several months and maybe even longer. A new plan and cost estimate will be needed to drawn up, since every individual project has its own specific funding requirements at various development stages. In a Real Estate project, there is no general yardstick for start-up costs. 

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Quantum of Funding

Depending upon the project magnitude, some require only minimal funding, while on the other hand others will entail huge costs in inventory or equipment. It must be ensured that sufficient funding is in possession to see the project to completion. For a reasonable estimate of overall costs all 'soft costs' must be included during the inaugural stage. These contain the fee for obtaining permits, engineering costs and infrastructure and construction costs. The continuous expenses for utilities, inventory,insurance etc, also must be factored in. All unnecessary costs must be eliminated and a realistic budget be arrived at, to complete the project at hand. The start-up costs could be calculated effectively with a worksheet that mentions all possible cost categories, both one-time and ongoing.

From then on, regular financial statements must be maintained. These provide a ready financial history of the project and helpful in the timely detection of anomalies that could eventually result in heavy losses. As far as possible, the real estate financing should be raised through one's own resources. Thereafter, there are options of debt and equity financing available. 

Civil law

Debt Financing

In the debt-based Real Estate Financing, money is borrowed from a creditor in exchange for future repayment along with interest. The lender has no ownership rights on the owner's business or business interests, including the project to which he is financing.

In the option where one do not wish to surrender any ownership interests in the business, debt financing is more suitable. In debt financing, the financing cost does not fluctuate and the loan is deductible. 

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Equity-based Financing

If Real Estate financing is decided through equity, one can opt for either private equity fund, or public equity. In public equity, one can opt for a listing on the local stock market, or a listing on a foreignmarket, such as the UK's AIM. It should be borne in mind that raising real estate financing from the public markets often turns out to be a costlier proposition, since it involves investment banking fees and other listing procedures. Eventually, the way in which the real estate financing is generated should depend on one's own strategic standpoint. Before deciding on any particular real estate financing route, one's needs have to be extensively researched. It is absolutely essential that expert help has to be sought in determining one's needs.

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