The economic situation in recent years is changing the rules of the game and the rules of project financing. Every developer knows how much harder it is today to obtain financing for a project abroad, and in an unstable interest-rate environment it has become harder still.
That is why, before setting out, it is important today to think through every aspect of the planned project and to put particular emphasis on financing.
Guy and Yael (pseudonyms) were about to buy a building in a tourist city, after carrying out, through us, all the required checks and finding that a permit could be obtained to turn the building into an apartment hotel. The building is located not far from the beach.
From the very beginning they understood that they did not have the equity required to buy the building, and certainly not to build on it the hotel they dreamed of, but they were not willing to give up. It was clear to everyone that for the construction we could obtain partial financing from the state in which the property is located, provided the project met the conditions. We began examining financing options in Israel and through the local office.
Guy and Yael quickly understood that this was not going to be simple. A bank mortgage on the property might become an obstacle to obtaining state financing at a later stage, and the terms, and especially the interest rates, on mezzanine loans (a loan intended to help complete the equity. The developer usually repays the loan in a single payment, plus interest, by a date set in advance. It is common in projects with bank financing, where the bank allows the developer to raise capital through this type of loan. In such cases the financing body relies on the main lender. It is considered an easier loan to obtain, and usually requires less collateral) made them irrelevant.
In parallel with the search for financing to complete the purchase of the property, Guy and Yael began working with the local architect and an Israeli designer on the changes needed in the building to turn it into an apartment hotel. Their dream began to take shape.
While we were struggling over which financing option to prefer, I raised the idea of launching a presale and trying to create a situation in which we could use part of the buyers' money to complete the purchase. Once the idea was raised, the two of them embraced it with enthusiasm, and we began examining the options from the legal and marketing perspectives. When we reached a solution agreed by all parties, including my local partner in the country where the property is located, it became clear that the solution would prevent them from receiving the state financing for the project (the terms of the state financing required the property to be fully owned by the developer, whereas in the solution we found, the sale to the final buyers was to take place at an early stage, before the financing application was submitted). This was supposed to be their concession, which would narrow their profit margin, but would let them carry out the project of their dreams.
Thus, through an escrow account and a legal structure that secured the buyers' money but allowed the developers to receive part of the consideration at an early stage, when ownership of the building is acquired, we helped Guy and Yael launch the project, which is now in the early stages of operating as an apartment hotel.
What is the solution for financing your project?
Are you, too, looking for creative financing solutions?
Stories are based on real situations, with identifying details changed. Not legal advice.
Translated from the Hebrew original. עברית