What financing structures support construction before tenant occupancy?

Securing financing before tenant occupancy—especially in build-to-suit (BTS) or speculative industrial development—requires careful structuring to mitigate risk for lenders or investors. Developers typically blend debt, equity, and pre-lease commitments to bridge the construction period, maintain liquidity, and ensure timely completion.

Below are the key financing structures used to support construction before a tenant moves in

1. Construction Loan (Project Finance)

• Structure:
  
  • Secured debt from banks or NBFCs tied to project milestones.
    
  • Disbursed in tranches (land acquisition, foundation, structure, fit-out).
    
• Requirements:
  
  • Clear title and zoning approvals.
    
  • The debt-to-equity ratio is usually capped at 70:30 or 60:40.
    
  • Interest during construction may be capitalized.
    
• Strength: Suitable when some pre-lease agreement (term sheet or MoU) is in place.

2. Bridge Financing or Mezzanine Capital

• Structure:
  
  • Short-term, higher-cost debt or hybrid instruments with flexible repayment.
    
  • Used to fill funding gaps until lease execution or long-term loan sanction.
    
• Features:
  
  • Often comes with an equity kicker (convertible debt or revenue share).
    
  • Faster disbursal with relaxed underwriting.
    
• Strength: Works when timing is tight, and tenant occupancy is within 6–12 months.

3. Equity Investment from Strategic or Institutional Partners

• Structure:
  
  • Joint venture (JV) or development partnership with industrial funds, HNIs, or real estate investors.
    
  • Capital infusion in return for profit share or exit rights.
    
• Strength:
  
  • Flexible terms.
    
  • Allows phased development and reduces interest burden during construction.
    
• Common Use: In BTS parks, where 1–2 anchor tenants are secured, but others will come post-Phase I.

4. Lease-Back Pre-Sale Agreement (Forward Funding)

• Structure:
  
  • The developer enters into a forward sale agreement with a REIT or institutional buyer.
    
  • Buyer commits to purchase upon project completion and lease commencement.
    
• Advantage:
  
  • Reduces balance sheet exposure.
    
  • Gives lender or investor confidence for interim financing.
    
• Condition: Requires a signed lease and fixed rental terms before construction starts.

5. Tenant-Funded Fit-Out or Security Deposit Models

• Structure:
  
  • Tenant pays a fit-out advance, security deposit, or cost-sharing amount before handover.
    
  • Funds are used to complete customization works or bridge working capital.
    
• Strength:
  
  • Lowers the developer’s upfront burden.
    

Indicates tenant commitment to occupancy.