The Real World of Large Commercial Project Financing

Large commercial projects

Many potential clients have a great project idea. Some may even have it well thought out, and have what they call a “business plan”. Normally, the client’s (self written) “business plan” is really only a long executive summary, and a financial pro forma (the client’s best guess as to what the project will actually cost, how much time it will take, and what profits might be realized from the operation of the project over a specific window). Essentially, it is a normally a document that puts the client’s project’s best foot forward, often without 3rd party data and endorsements. It is often crucial to have this information reviewed by an independent third party underwriting firm in order to establish the merits, and flaws, in the project. Underwriters within collateral providers and lenders are not so much concerned about what they believe the “know” (what information is expressed by the project promoters) about a project; but what “scares” them, what they are unsure that they “don’t know” about a project. Even if a 3rd party underwriter’s findings can’t be “solved” by the project promoters prior to submission to the underwriters at collateral providers and lending sources, at least the “negative” aspects have been pointed out by an independent review, and, thus the decision makers are normally more comfortable with the project as a whole.

Too often, intermediaries and clients don’t understand why it is so difficult, expensive, and time consuming to fund a project – especially a start-up venture with no assets, and no money behind it.

We often hear from intermediaries and clients “why can’t we just find an individual investor to give us the money or a JV or VC partner or an Individual investor?” That is easier said than done. These funding sources want assurances that a project with little or no assets can actually be managed properly by the project’s management team, has estimated the costs and time frame accurately, and has a real understanding of profits to be realized. Put yourself in the place of the investor – would you simply lend your own money to a group you had never met based on their own evaluation of their project idea without 3rd party data and/or endorsements? Or at least an independent underwriter’s evaluation?

There are far too many “good idea” what we call “paper projects” (projects
without at LEAST 10% of the project requirement in available cash TODAY and/or 2 to 3 times the determinable and appreciating collateral necessary to obtain a loan) that are seeking funding. If sources spent money each time they had a “paper project” present their particular “good idea’ the sources would soon spend themselves into oblivion.

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