22. 11. 27.

오후 2:38 Real Estate Project Finance - Know Different Funding Types

Home › Resources › Commercial Real Estate › Real Estate

Project Finance

Real Estate Project Finance

Different types of funding for a real estate development project

Written by CFI Team

Updated October 7, 2022

What is Real Estate Project Finance?

Project finance is long-term financing of an independent capital
investment, which are projects with cash flows and assets that can be
distinctly identified.  Real estate project finance is a classic example. 
Other examples of project finance include mining, oil and gas, and
buildings and constructions.

https://corporatefinanceinstitute.com/resources/commercial-real-estate/real-estate-project-finance/ 1/7
22. 11. 27. 오후 2:38 Real Estate Project Finance - Know Different Funding Types

Real estate project finance cash flows should be sufficient to cover

operating expenses and to fund the financing repayment requirements.
Typically, the financing is made up of debt and equity matched to the
lifespan of the asset.

Real Estate Project Finance vs Corporate Finance

When a corporation takes on a new investment, it can use cash flows
from other operating activities to fund the new project.  It can also use
its general creditworthiness to borrow money and fund the project.  The
corporation might also issue equity with an indefinite time horizon.  In
real estate project finance, equity used to fund the project is usually
repaid at the end of a specific time horizon.

Capital Stack in Real Estate Project Finance

When it comes to funding real estate project finance, the capital stack
includes several considerations, as follows:

Draws on construction loans for financing

Security and priority for various lenders in the capital stack

Term that matches the length of time it takes to develop and sell the
project

Trade-offs between fixed and floating interest rate

Pricing around the equity

The capital stack, which consists of all of the different types of financing
that may be used, typically comprises the following:

Senior debt

Subordinated debt

Equity

Senior debt is the most secured capital, while equity is the riskiest out of
the three.

Real Estate Project Finance Industry Terms and Definitions

https://corporatefinanceinstitute.com/resources/commercial-real-estate/real-estate-project-finance/ 2/7
22. 11. 27. 오후 2:38 Real Estate Project Finance - Know Different Funding Types

To build a financial model, we need to understand the important terms

and definitions frequently used in real estate project finance:

Loan to value (LTV): The amount of debt financing a lender will

provide as a percentage of the market value of the real estate.

Loan to cost (LTC): The amount of debt financing a lender will

provide as a percentage of the cost of a development.

Net operating income (NOI): Gross rental revenue less operating

expenses (property taxes, insurance, maintenance, etc.).

Cap rate: NOI divided by the value of the property, expressed as a

percentage.

Amortization period: The number of periods (months or years) the

principal repayments of a loan take to be completed.

Term: The length of time that the interest rate on a mortgage loan is
agreed for.

General partner (GP): An owner of a partnership with unlimited

liability – usually a manager who actively participates in the
operations.

Limited partner (LP): A passive investor who has limited ability,

based on the amount they have invested in the project.

Land loan: Financing used to acquire a piece of land with no NOI.

The long-term value will be much lower than that of an income-
producing property.

Floor space ratio (FSR): Used to determine the size of a building and
control the density of development on a parcel of land.

Gross building area (GBA): The sum of all building spaces from wall
to wall.

Gross leasable area (GLA): The sum of all enclosed livable space.

https://corporatefinanceinstitute.com/resources/commercial-real-estate/real-estate-project-finance/ 3/7
22. 11. 27. 오후 2:38 Real Estate Project Finance - Know Different Funding Types

Gross site area: The two-dimensional measures of a site, based on

its property lines.

Deductions: A portion of the gross site area that cannot be built on,
such as public access areas, roads, lanes, etc.

Net site area: The gross site area, less any deductions.

Max GBA: The gross building area, calculated based on the FSR.

Construction GBA: The gross building area, based on construction

plans.

Saleable area: The gross building area based on construction, less

all common spaces or other non-salable areas.

Real Estate Project Finance – Development Timeline

Understanding the development process and timeline helps us get a
clear map when building a real estate project finance model.  There are
several stages in a real estate development project:

https://corporatefinanceinstitute.com/resources/commercial-real-estate/real-estate-project-finance/ 4/7
22. 11. 27. 오후 2:38 Real Estate Project Finance - Know Different Funding Types

Different types of funding are used at each stage of the life cycle of real
estate project finance.  For example, a company may use equity to
finance the sourcing of deals. This is because there is high risk in the
early stages of a project and, therefore, it may be hard to obtain bank
loans.  In the later stages, such as rezoning and pre-development, the
projects are usually financed with both loans and equity.

Real Estate Project Finance – Financial Model & Valuation

Below is a screenshot from CFI’s Real Estate Financial Modeling Course,
where you can learn how to build a development model from scratch in
Excel. Step-by-step instructions.

More Resources
Thank you for reading CFI’s guide to Real Estate Project Finance. To help
you advance your career, check out the additional CFI resources below:

Due Diligence in Project Finance

Financial Modeling Best Practices

Project Budget Template

Real Estate Joint Venture

Share this article

https://corporatefinanceinstitute.com/resources/commercial-real-estate/real-estate-project-finance/ 5/7
22. 11. 27. 오후 2:38 Real Estate Project Finance - Know Different Funding Types

Get All Four Programs (Monthly

Subscription)
Learn More

We're hiring!

Company

Certifications

Courses

Support

Resources

https://corporatefinanceinstitute.com/resources/commercial-real-estate/real-estate-project-finance/ 6/7
22. 11. 27. 오후 2:38 Real Estate Project Finance - Know Different Funding Types

   

© 2015 to 2022 CFI Education Inc.

Privacy Policy Terms of Use Terms of Service Legal

https://corporatefinanceinstitute.com/resources/commercial-real-estate/real-estate-project-finance/ 7/7