Last edited 14 Sep 2020

Funding options for building developments

It is rare in the private sector for the client to provide all the funding for its capital projects and even in the public sector the government has sought to use external funding by means of the private finance initiative (PFI).

A preliminary assessment of funding options should be carried out when considering whether to proceed with a project.

This assessment might consider:

Budget.
Draw-down facilities.
Approvals and consents.
Tax and grants (such as UK trusts and foundations and European trusts).
Loan size and term.
Land and site value.
Building costs.
End valuation.
Stage payments.
Planning risk.
Profit on cost.
Collateral or guarantor.

Sources of funding might include:

Construction and development loans from a specialist property funder or senior debt lender (such as a commercial or high street bank).
Mezzanine finance.
Bridging finance.
Project finance with special project vehicle (equity) and syndicated non-recourse loans and /or limited recourse finance.

For the public sector, funding options might also include:

If assistance or advice is required from the consultant team or independent client advisers in the preparation of a funding prospectus, application for grants etc, then this should be made clear in appointing documents as it may not be included in their standard scope of services.

NB: The damning 2011 House of Commons Treasury Select Committee report on PFI has found '...that PFI projects are significantly more expensive to fund over the life of a project' and that there is no '...clear evidence of savings and benefits in other areas of PFI projects which are sufficient to offset this significantly higher cost of finance'.

On the 5th December 2012, the government published details of a new approach, stating that it ‘…remains committed to private sector involvement in delivering infrastructure and services, but has recognised the need to address the widespread concerns…’. The new version of PFI is referred to as PF2, and the key changes are set out in the article: PF2.

In the October 2018 Budget, the then Chancellor Philip Hammond announced that he would abolish the use of private finance initiatives (PFI) for future building projects.