Real estate development financing challenges – what you need to know

Introduction

Real estate development is one of the most profitable yet complex business sectors. Without sufficient and strategically secured financing, projects can remain on paper or face financial difficulties before completion. This article examines the key challenges and solutions in real estate project financing.

1. Critical factors for securing financing

To successfully secure financing for a real estate project, financiers evaluate several aspects:

• Equity investment – how much capital the developer has already invested in the project.
• Valuation – real estate market value and potential growth.
• Financing type (LTV or LTC) – the ratio between the loan and property value or project costs.
• General contractor and developer experience – how professionally the project is managed.
• Sales strategy – whether the property is already reserved, or if there's a clear plan for sale or rental.

2. Where to look for real estate development financing?

In Latvia, developers have access to various financing offers:

• Platforms – offering financing from €100k to €5M with terms from 3 months to 3 years.
• Non-bank lenders – offering €100k-€2.5M with terms up to 10 years at 9-11% interest.
• Banks – both first and second-tier banks offer financing, though their approach is more conservative.

3. Alternative financial institutions vs banks

To help entrepreneurs understand the different financing offers and their differences, here is a detailed comparison:

Loan amount: Alternative institutions offer from €50,000 to €5,000,000, while banks offer much larger loans – from €100,000 to €30,000,000. Interest rate: Alternative institutions charge 12%–18%, while banks offer lower rates of 4%–7% + 6-month EURIBOR. Term: Alternative institutions offer shorter terms (6–36 months), while banks offer long-term loans (2–10 years). Equity requirement: Alternative institutions have lower requirements (0%–30%), while banks typically require 30%–40%. Financing method: Alternative institutions use both LTV and LTC methods, while banks mainly use LTC. Geography: Alternative institutions mainly focus on Riga and the Riga region, while banks offer financing throughout Latvia. Construction supervisor and contractor: In the alternative sector, the developer decides; in banks, the bank makes the decision. Experience: Previous experience is less important for alternative institutions, making them more suitable for new developers. Definitions:

• LTV (loan-to-value) – financing method where the loan is granted against the property valuation.
• LTC (loan-to-cost) – financing method where the loan is granted against the total project budget.

4. Summary

Alternative financial institutions offer more flexible terms with shorter periods and higher rates, suitable for smaller and medium-sized projects, as well as new entrepreneurs with less experience. Banks offer larger loans with lower rates and longer terms, but with stricter requirements regarding equity, prior experience, and other details.

5. Key advantages and disadvantages

Advantages:

• Large sums available even for ambitious projects
• Long-term partnerships – good foundation for future projects
• Bank and non-bank combination – good solution for refinancing

Disadvantages:

• Process can be lengthy, especially with banks
• Significant workload – lots of documentation and negotiations with financiers
• Many unknown factors, such as interest rate fluctuations

6. How to choose the right financing?

Depending on the project stage and developer strategy, different financing solutions may be needed:

• Early stage – capital needed for land acquisition and design.
• Construction phase – working capital to ensure construction continuity.
• Completion and sales phase – refinancing or loan repayment from sales revenue.

How does Oferta Finance help?

We specialize in business financing, and real estate development is one of our key areas:

• We compare all available financing offers to find the best one.
• We quickly conduct negotiations with banks, non-banks, and investment platforms.
• We work in the client's interest to achieve optimal terms and financing speed.

If you're a real estate developer looking for financing, contact us – we'll find the most suitable solution!