Construction loans play a vital role in real estate construction projects as they contribute a large part of the project cost which is necessary for the timely completion of the project and to win the trust of the buyers. Real Estate projects require the continuous flow of money which will be available through the resources that are pre-defined before the launching of the project. Real Estate projects require three main financial components or financial resources:
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- Promoter Contribution: This is the share of money pooled by a builder/promoter of the company in which projects are launched. It was pre-decided as per the finance availability of the promoters. This ranges from 10% of the total project cost to 50 % of the project cost depending upon the current availability of funds.
- Sales Receivables: This is the amount received from the sale of units of the project. This is an assumption of the estimate made in the early stages of the project. This could range between 30-40% of the total project cost.
- Builder Finance: This is a loan raised from a financial institution in the form of debt for the construction of the project. This can be raised at the early to mid or last mile of the project development according to the requirements of funds.
Key Factors for Raising a Construction Loan
There are key factors on which a lender considers a project for approving a construction loan like location, connectivity, pricing & and reputation of builders. These factors are fixed and cannot be altered but a few factors like promoter contribution, project sales receivables, and previous profile of the developer can be managed for raising a loan at better pricing. Moreover, the location and profile of the developers play the most important factor in raising a loan.
Type of Projects for which Construction Loan is Given
Construction loans can be given for raising following types of Projects:
- Construction Loan for Residential Projects: This is the most preferred type of project in which lenders are interested in financing. Residential projects are preferred over other kinds of projects because of the large consumer base and inflow of affordable housing projects so all this makes it the top choice of lenders.
- Construction Loan for Commercial Projects: Loans for commercial projects are also provided through some financial institutions against lease rentals or against the sale of units. Loans for commercial projects are available only in major cities of India.
- Construction Loans for SRA Projects: A lot of lenders provide construction loans to develop an SRA project mostly in the Mumbai region. Loan offered only in accordance with the developer share.
Conclusion
Construction loans can be raised through NBFCs & fund houses that specifically set up a fund dedicated to investing only in real estate projects in the form of term loans & equity finance.
