Project Financing and Escrow

Structure of Financing a Development Project

Financing is one of the key aspects of development. The correct financing structure determines the profitability of the project and the level of risks.

Sources of Financing

1. Own Capital (equity)

• Developer's funds (company's own capital)
• Usually accounts for 20–40% of the total project cost
• The most expensive source (high required return)
• First investments (land purchase, design)

2. Borrowed Capital (debt)

• Project financing from banks
• Usually 60–80% of construction costs (LTC — Loan-to-Cost)
• Collateral: land plot + construction object
• Rate: EURIBOR/SONIA + margin 2–5% (Europe), EIBOR + margin 3–6% (UAE)

3. Buyers’ Funds (off-plan payments)

• In UAE: directed to an escrow account, used for construction based on milestones
• In Europe: tied to construction stages (MaBV in Germany, VEFA in France)
• In UK: deposit 10–20%, remainder upon completion

4. Government Programs and Subsidies

• EU Structural Funds for regional development
• UK Affordable Housing Programme
• Abu Dhabi Housing Authority programs
• Preferential loans from the European Investment Bank (EIB)

Mechanism of Project Financing

Project financing is lending where the source of loan repayment is the cash flow from the implementation of the project itself, not the general assets of the borrower.

How project financing works:

1. The developer creates an SPV (Special Purpose Vehicle) — a separate legal entity for the specific project
2. The SPV acquires a land plot (using the developer's own funds)
3. The SPV enters into a loan agreement with the bank (Facility Agreement)
4. The bank opens a credit line (Revolving Credit Facility) with a limit
5. The developer draws down credit funds as construction progresses (drawdown)
6. Buyers make payments into an escrow account (UAE) or according to a schedule (Europe)
7. In UAE: the escrow agent disburses funds upon milestones; in Europe: payments go to the developer based on the schedule
8. After construction completion and sales — loan repayment
9. The remainder — the developer's profit

Key loan parameters:

• LTC (Loan-to-Cost) — the ratio of the loan to the project cost (usually 60–75%)
• LTV (Loan-to-Value) — ratio of the loan to the value of the asset
• ICR (Interest Cover Ratio) — interest coverage ratio
• DSCR (Debt Service Coverage Ratio) — debt service coverage ratio
• Term — for the period of construction + 12–18 months for realization

Features of Financing in UAE

The project financing market in the UAE has its own specifics:

Main banks: Emirates NBD, Abu Dhabi Commercial Bank (ADCB), Mashreq Bank, HSBC Middle East, First Abu Dhabi Bank (FAB)

Financing structure:

• Equity: 30–40% (banks in UAE require a higher equity contribution)
• Debt: 60–70%
• Off-plan collections via escrow: used for construction based on milestones

Escrow requirements (RERA):

• The developer is obliged to open an escrow account for each project
• Buyers’ funds flow only into escrow
• Payments to the developer — upon achievement of milestones (foundation, structure, MEP, finishing)
• Bank-agent controls the spending of funds

Financing in Europe

United Kingdom:

• Main banks: HSBC, Barclays, Lloyds, NatWest, OakNorth
• LTC: 55–70%, rate: SONIA + 3–6%
• Mezzanine finance to increase leverage (rate 8–15%)
• Build-to-Rent (BTR) financing — a separate category with longer terms

Germany:

• Main banks: Deutsche Bank, Commerzbank, pbb Deutsche Pfandbriefbank, Berlin Hyp
• LTC: 60–75%, rate: EURIBOR + 2–4%
• Pfandbrief — mortgage bonds as a source of refinancing

Green Financing and Covenants in Project Financing

Environmentally sustainable construction provides access to Green Loans and Sustainability-Linked Loans (SLL) — specialized credit products with preferential rates (discount 10–30 bp) if the criteria of the EU Taxonomy Regulation are met.

Conditions for receiving a Green Loan:

• The property receives BREEAM “Very Good” / LEED “Gold” certification or higher
• Energy consumption at least 20% below EPBD (Energy Performance of Buildings Directive) standard
• Use of proceeds reporting
• UAE: under the UAE Net Zero 2050 Strategy — preferential loans from HSBC, Emirates NBD, FAB for projects with Estidama 3 Pearl+

Covenants in project financing — developer obligations, violation of which gives the bank the right to demand early repayment:

Monitoring of covenants is performed by a Monitoring Surveyor — an independent expert, who monthly reports to the bank on construction progress, compliance with the budget, and fulfillment of the pre-sales plan.

Practical Assignment

<details> <summary>Assignment: Comparison of Financing Structures</summary>

Compare the financing structure of a residential project in UAE and the United Kingdom.

Data:

• Project cost: EUR 100 million / AED 400 million
• Construction period: 30 months
• Sales pace: 70% off-plan, 30% after completion

Example answer:

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