Ways to Approach the Financing of Construction Projects

It is the professional experience of Capital Corp Merchant Banking that construction financing commonly falls into two separate categories; namely (1) Direct Financing or (2) Separate Entity Financing.

The first category, direct financing, is done without the use of setting up a separate entity and rather focuses on the construction would be funded from the Client’s existing company.  Based on such, all forms of financing available to the company, such as previously approved and recently accepted facilities, are typically allocated toward the completion of the respective project.

The major drawbacks of this approach, however, lie in usually not being able to take advantage of certain tax benefits due to accounting issues as well as the security interest of the new construction project may “attach” itself to other lenders or agreements.

Given such, it is quite common to see Clients proceed with the second approach: separate entity financing.  Here a corporate entity, separate from a Client’s current business(es) is created solely for the construction of the project.  It is, however, not uncommon for the Client to “sponsor” the project with an equity investment or loan from their other companies.

As discussed, the benefits of this approach mostly stem from the drawbacks of the direct approach.  In separate entity financing the simplicity of the sole project allows for simple and clear accounting records, which in turn allows for taxable benefits such as depreciation during construction period and capitalization of expenses to plant cost.

Ultimately, the goal of project financing is different from client to client; therefore a Client must clearly determine his/her priorities and abilities to determine which approach is best.


Respectfully,

Capital Corp Merchant Banking