Types of Fund Raising Options in Real Estate Sector

Raising money is hard. And when you’re relatively new to the process it’s easy to be confused by the process. There is all sorts of advice on the Internet about how to raise capital. Of course much of it is conflicting. Below is the list of options availabe for raising funds in real estate.

Types of Fundraising done

  • Construction Finance (CF)
- Construction Finance is the long term financing based upon the projected cash flows of the project rather than the balance sheets. This Construction loans are secured by the project assets and paid entirely from project cash flow. Project finance lenders are given a lien on all of these assets, and are able to assume control of a project if the project company has difficulties complying with the loan terms.
  • Balance sheet Funding – Entity level funding is the financing based on the strength of the balance sheet and not on the basis of individual Special Purpose Vehicle (SPV) or individual project basis.
  • Land Acquisition Funding (LAF) 
- Financing for acquisition of land. Banks are not permitted to provide LAF to private builders as per master circular on housing finance.
  • Plain Vanilla Equity 
 – Equity financing is a method of raising funds to meet liquidity needs of an organisation by selling a company’s stock in exchange for cash. The portion of the stake will depend on the promoter’s ownership in the company. Equity financing is slightly different from debt financing, where funds are borrowed by the business to meet liquidity requirement. Ideally, to meet liquidity needs an organisation can raise funds via both equity as well as debt financing.
  • Loan Against Property (LAP) 
 – A loan against property (LAP) is exactly what the name implies a loan given or disbursed against the mortgage of property. The loan is given as a certain percentage of the property’s market value, usually around 60 per cent to 80 per cent. Loan against property belongs to the secured loan category where the borrower gives a guarantee by using his property as security.
  • Lease Rent Discounting (LRD) – Lease Rental Discounting (LRD) is a term loan offered against rental receipts derived from lease contracts with corporate tenants. The loan is provided to the lesser based on the discounted value of the rentals and the underlying property value. Normally loan is given upto 70% to 80% of lease rental
  • Refinancing of Loan – Refinancing is a route wherein new lenders take over project loans of existing lenders and thereby stretch the loan’s repayment over a longer period. Through this route, existing lenders get relief on their capital to pursue new lending opportunities and infrastructure projects get the benefit of a longer repayment period.
  • Joint Ventures/Auctions/Joint Developments – A joint venture (JV) is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. JV can be as a revenue share or area share basis in real estate.

This is not a comprehensive checklist there are various other options but above mentioned methods are followed mostly in the sector

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