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Funding Agreements

Most construction projects cost millions of dollars between equipment costs, staff salaries and various expenses (planned and unplanned). To acquire the necessary capital, the parties responsible for the project normally have to go to a financial institution that develops a financing agreement for the amount needed. The proceeds of financing contracts are similar to capital guarantee funds or guaranteed investment contracts, both instruments also promising a fixed rate of return at low or no risk for the investor. In other words, guarantee funds can generally be invested without risk of loss and are generally considered risk-free. However, like certificates of deposit or pension certificates, financing agreements generally offer only modest returns. Funding agreements generally stipulate that money must be used for specific purposes. The reason is that the lender has agreed to allocate funds to a particular project, and if the loan is used for something else, its risk profile may change. The description of the intended use cannot be general, as in „the funds are used to build an apartment building in Midtown.“ Instead, the agreement must determine the amount to be used for the purchase of raw materials, the participation of contractors, etc. Financing agreements and other similar types of investments often have liquidity constraints and require prior notification – either by the investor or by issuing – for early withdrawal or termination of the contract. This is why agreements are often aimed at wealthy and institutional investors with substantial capitals for long-term investments. Mutual funds and pension plans often purchase financing agreements because of the security and predictability they offer. The terms of repayment of construction finance agreements indicate when and how the money should be repaid.

Loans for large multi-phase projects generally have complex repayment terms. For example, during construction, the money is deducted and the repayment is deferred, either by rearranging interest until the start of operating income, or by allowing the borrower to make an additional remedy to cover interest payments. Minimum payments should be sufficient to ensure that, in the worst case scenario, the loan can be fully paid within a maximum period of time. A financing contract product requires a lump sum investment paid to the seller, which then offers the buyer a fixed rate of return over a period of time, often with the LIBOR-based return, which has become the world`s most popular benchmark for short-term interest rates.


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