Surplus Release
Surplus release is a financing move that allows the developer to receive liquidity during the life of the project, against anticipated surplus funds or developer profit expected to be released later, in projects operating under bank or non-bank project financing. In practice, this is an interim solution designed to deal with a situation where the project is progressing and even generating revenues, but the project-financing mechanism still does not allow the developer to withdraw surpluses.
In which cases is surplus release relevant?
Surplus release is usually carried out through a supplementary loan whose characteristics are similar to mezzanine financing or subordinated debt, the purpose of which is to provide the developer with early cash against future surpluses that are expected to be released from the project and/or equity that has already been invested by the developer in the project, and is mainly common when one or more of the following situations exist:
Project progress: The project shows significant progress in execution and sales, but approval has not yet been received to withdraw surpluses under the project-financing arrangement.
Need for working capital: Working capital is required to continue ongoing operations, such as meeting milestones, covering planning and execution expenses, and other operational expenses.
Business opportunities: The developer needs liquidity in order to advance additional projects or to take advantage of business opportunities, such as purchasing land or advancing planning.
Cash-flow gap: There is a temporary cash flow gap despite the expected profitability of the project, resulting from the fund-disbursement mechanisms of the financing provider.
Financing providers for surplus release
In most cases, surplus release loans are provided by non-bank financing providers (credit funds/supplementary financing entities) that specialize in real estate development financing and financing layers that are not senior debt. This is because the senior lender controls the project-financing mechanism and prefers to maintain full priority, while surplus-release financing is added to the existing structure and sometimes at a secondary level.
It is worth noting that the procedure for surplus release or releasing invested equity usually involves obtaining approval from the senior financing provider of the project, since it requires the registration of an additional lien, usually in second ranking, on the project's assets.
Reiten Mortgages and Real Estate operates in the field of credit advisory services for real estate developers while having practical familiarity with project-financing structures and supplementary financing, and in particular in situations where it is required to plan a process of surplus release in a way that is compatible with the project-financing documents and the stage of the project. An orderly work framework makes it possible to examine feasibility, define an exit point, and formulate a clear outline based on the project's data and its obligations.
Are you interested in examining whether surplus release is suitable for your project, and what is the appropriate financing structure alongside the existing project financing and the expected cash flow? Leave us details or call us at *8537 during business hours; we will be happy to assist.