Why doesn't the bank just finance the entire real estate project?

April 16, 2020
Thomas Sonne-Schmidt
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There are a lot of solid Danish real estate projects that cannot be implemented due to lack of financing and it is of course relevant to ask "why doesn't the bank just finance the whole thing when they now have all the money available"?

There are two natural constraints on why banks cannot/will not provide the entire construction financing for a real estate project:

  1. legislation
  2. internal credit policies

In addition, there is a more individual and market-oriented assessment by each bank advisor. If the real estate project is pre-sold, this will be generally positive, but this does not mean that a bank can/will provide full construction financing.

Depending on the individual property project, a bank can typically participate with 40-60% of the total construction financing - the bank will require that the remaining part of the construction financing comes either as equity (from the property developer) or from other external financing.

In addition, banks also have requirements on how much financing/loan can be in a single real estate project, which places greater demands on the equity in the real estate project. We at have accommodated this by building a deal structure and a specific transaction process for the escrow account, so that banks will be able to consider the funding from our crowdinvestors as just equity.

If the bank contributes X% and the property developer itself can contribute Y%, then there will be a funding shortfall of Z% - and this is typically the portion raised from crowdinvestors via and shown on the "funding target" on the individual project page.

We always recommend obtaining as much bank financing as possible for each property project - this is because this financing is the cheapest in terms of interest. The remainder raised via crowdinvestors is typically at an interest rate of 6-10% p.a. The combination of bank financing and crowdinvestor financing, overall, results in an interest cost that is acceptable to the real estate developer and the real estate project.

Inother words: banks cannot/must not provide full construction financing and without the additional financing (under the right conditions) from e.g., the individual real estate project could not be realized/constructed. In combination with the financing via, both the real estate developer, the bank and the crowdinvestors can get a good deal.

CrowdInvestors on are thus indirectly helping to realise good real estate projects, helping to create new homes for families and also directly helping to strengthen employment in the construction industry - We think this is quite meaningful. This kind of investment is also called Crowdlending, which can actually help keep the Danish economy going.

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