I found myself at a loss for words since I have never really thought through the process followed by financiers. I believe he will find his answer here after I did a research into the process of obtaining a construction loan from local banks. This feature will cover the essential elements that banks and financiers look out for especially for commercial projects.
Is the project feasible? Is it Practical?
Firstly, banks and financiers in general are keen on finding out how much you know about construction and your project in particular. This is where you need the specialized services of a Construction Project Manager to help you develop a feasibility report. This report is a requirement for banks to finance your project.
The feasibility report will basically capture the trends in supply and demand within the construction industry in general. It will also cover the areas where your project falls. If you are putting up a hotel, data from authorities in tourism, meetings, conventions and conferences may help in making an informed decision. If you are putting up a private school, you need to show how well you understand the trends in school environments, populations and government policies that govern the setting up of learning institutions. Essentially, understand your market in relation to the project you are setting up. You can ask yourself questions such as: What are the trends in construction? What do the most recent projections indicate? How will my project benefit?
How well can you describe your project?
There is no question as baffling as “Who exactly are you?” The question does not ask you for your name or a description of yourself. It is important that you describe what your project entails fully.
In construction, just like any other business, the sole objective is to make a profit. Profit comes from either selling or renting the property that you are investing in. Banks want to know how much money you are anticipating from your project. They are also in the business of making money, remember? It is impractical to put up an apartment block for sale at Ksh 15 million in an area where similar apartments cost Ksh 6 million. The reverse is true.
That means that you should understanding the environment where your development will be set up. How are similar projects in the neighbourhood comparing to your project in terms of the rent levels or selling price? What is so unique about your project that tenants will either buy or rent at the selling price or rent level you have set? This means that you need to fully understand what additions or extras in your project will translate to value to your customers.
We all want money at the end of the day. Successful developers know how much to invest in their projects and how much they will either rent or sell them at in order to make the desired profits. Greedy developers do not survive for long. This means that you should set the rent or selling price at a level that reflects the supply and demand of the units you are either renting or selling.
First, how much is your project going to cost you? Here, you need the services of a qualified Quantity Surveyor. The QS will use the drawings from the engineers and architect to establish cost estimates for the project you have in mind. Remember that we covered the subject of the 5 people you need in a construction project.
What’s your Financial Plan?
Next you need to determine your project financing plan. The Construction Project Manager will help you with establishing the best way to arrange for financing. If you have ever successfully completed a detailed business plan, then this section is similar to that. Numbers, charts and analysis of the investment are the key elements. It is important to note that financiers require that you should be able to contribute a prescribed proportion of the construction cost. Why would they pump in money in a project where you haven’t demonstrated capacity, ability and willingness to sink in your own resources? The construction project manager will also help you to come up with projected cash flow. Remember that you need to pay back the loan – and rake in your profits.
So where is the money that you are planning going to sink into the project going to come from? Construction is a capital intensive and complex process. Some developers use the land they own as collateral in order to secure funding for the project. In this case, financiers require that you demonstrate that the title deed is clean.
Clean Title Deed
A clean title simply means that your ownership of the land is valid. No-one else should contest your ownership of the land upon which you want to develop. In short, you must be the legal owner of the title. This is to enable easy transfer of the land since there are “no strings attached”. You must also demonstrate to the banks or financiers that all the land rates have been paid fully.
Who is handling your Project?
We have talked about why you need professionals to run your construction project. Financiers need to be assured that the funds shall be handled by responsible people. Is your architect qualified? Is he registered? What about the QS and the Engineers? Even the Contractor ought to be a competent one. Responsibility is the name of the game – in order to cater for risks that are usually associated with projects handled by incompetent people. Banks require that all professionals involved in your project to present all documents that demonstrate their competence: Certificates of Registrations, Indemnity Covers, company profiles and other prescribed documents.
Are your Documents Approved?
A bank will never process any funds for projects whose drawings have not been approved by the relevant authorities. Approvals basically show that the project has been reviewed and confirmed to having met all the necessary requirements before it is built. Environmental Impact Assessment should be conducted by a licenced National Environmental Management Authority (NEMA) auditor. The Bills of Quantities must be done and signed by the project QS. You also need to have a practical plan for your project. What are your timelines? Time is money, right? Do you have the change of user approvals?
Ensure that you also have the appropriate contracts and subcontracts in place. A contract between you and each of the consultants on board. A contract between you and the contractor. The contractor needs to have a contract with his/her subcontractors. It is good practice to ensure that the relevant contracts have also be registered. Find out what that means from your lawyer.
The above are usually applicable in commercial projects. Residential apartments, gated communities or estates, shopping centres or any development that is going to generate income through rent or selling.
It is important to note that how much you can get from a bank or a financier depends on the relationship you have with your bank and your ability to negotiate. The soft skills are the main determinants on whether you will land that construction loan or not. Also your ability to pay back the loan will reinforce the confidence of the financiers. Banks can and have re-possessed projects from borrowers who failed to meet the financial obligation as far as the construction loan is concerned.
Here is a checklist done by Ujenzibora… Just in case this article is too long for you.