Financing is a fundamental component of every construction project. Yet, it’s notoriously difficult to obtain a construction loan, particularly in the industrialized construction space, where many financial institutions are weary to invest in something they perceive as risky and complex.
Developers, however, know that modular construction is actually one of the most well-constructed and affordable options on the market today. Constructing a building or sections of a building in a factory, modular construction takes an assembly-line approach to building, with highly-skilled workers tending to their sections with expertise and creating an efficient and sturdy final product that’s then assembled on site.
While there’s a large and growing market for modular construction projects for everything from homes to schools and data centers, the financial market is still trying to catch up with this new process, technologies and businesses. So developers are getting creative, finding interesting and successful ways to finance their modular construction projects. Below, we explore some of the best options. But first, let us explain why modular construction financing is different.
Financing modular construction differs from traditional construction financing in several ways.
Firstly, the construction process for modular buildings is different, with the majority of the work being done off-site in a factory. This means that the financing needs to take into account the upfront costs of building the factory, as well as the costs associated with manufacturing and transporting the modular components to the construction site.
Secondly, modular construction projects tend to have a faster construction timeline than traditional construction projects, which can lead to quicker revenue generation and a shorter payback period. However, this also means that the financing needs to be structured in a way that takes into account the shorter timeline, as well as any potential risks associated with modular construction.
Thirdly, modular construction projects are often more standardized than traditional construction projects, with a greater emphasis on repetition and scalability. This can make it easier to estimate costs and reduce the risk of cost overruns, but may also require a different approach to financing than traditional construction projects.
Given these differences, developers of modular construction projects may need to explore alternative financing options to those typically used in traditional construction.
We recently read about Volumetric Building Companies’ inventive workaround the red-tape and time-intensive Low Income Housing Tax Credit, which is a more traditional way to fund affordable housing projects.
To build the 47-unit multifamily Veterans Village in Philadelphia, VBC first acquired a 501c3 certification to build housing for vulnerable populations. They were then able to raise capital in the form of donations from individuals, corporations, and suppliers to secure a traditional construction loan from a community bank that was looking to invest in its local community.
VBC is in the process of refinancing through a loan product from the U.S. Department of Housing and Urban Development. The company notes that refinancing through HUD for a completed building is much more straightforward than securing an initial construction loan — and the terms are more favorable. All in all, VBC avoided the hassle and red tape involved in the LIHTC process, and they built a fantastic affordable housing project in a fraction of the time.
The folks at Atelier Capital Partners have seen the market stunted by the established lending framework and are looking to kickstart it with a new accreditation system. Adopted to the needs of small and medium-sized developers, this process leverages existing accreditations in the U.K. from the Buildoffsite Property Assurance Scheme and the U.K.’s National House Building Council to help obtain warranties.
“While this is an example overseas in the U.K., we could see a similar kind of accreditation system develop here in the U.S.,” says Carson Holmquist, co-founder of Stream Modular. “By proving that a manufacturer or developer is building these modular construction projects to a high enough standard, as well as having a solid financial background, we could help get more of these projects and businesses off the ground. Instead of trying to fit into the existing financial framework, we could build our own.”
Finally, another popular creative solution these days is to simply go outside the bank lenders. Gregg Delany, managing director at real estate capital advisory firm Eyzenberg & Co., explains to CFO Dive that he’s worked with everyone from real estate investment funds to debt funds to make modular deals happen. Delany says these kinds of lenders understand the huge potential this market has, as well as how to think beyond the typical financing standards in place today.
“[Nontraditional lenders] realize that this type of housing actually qualifies for agency permanent financing upon stabilization and have developed with us financing mechanisms to allow for advances to fund the construction in the factories as well as once [the units] are attached and become part of the real collateral,” Delany says.
Given the growing popularity of modular construction, there are now lenders who exclusively specialize in this kind of financing. They bring together experts from both the financing and modular worlds to develop flexible construction financing solutions that support the unique needs of these kinds of projects.
For example, US Modular Capital is a Chicago-based privately funded financing lender specializing in volumetric modular construction projects. The company’s commitment to the industry stems from a belief in modular as the future for more sustainable construction and a potential solution for the affordable housing crisis. As their mission states, “Our mission is to help developers build quality projects faster and more predictably through accessible funding for modular construction. Modular is key to solving the affordable housing crisis and allows developers to innovate their processes, realizing profits faster than with traditional construction.”
We’ve seen many other creative ways that developers are finding equity for their modular construction projects. For example, crowdfunding allows investors to contribute funds to the project in exchange for a stake in the development. Additionally, partnerships with manufacturers can be a creative way to finance modular construction, with the manufacturer providing financing in exchange for a guaranteed order of modular components. These and other creative financing options are helping to fuel the growth of modular construction in today’s market.
Efficiencies in cost savings are crucial when seeking financing for modular construction projects, and your logistics partner can play a key role in achieving these savings. A logistics partner can provide expertise in supply chain management, optimizing delivery routes, and reducing transportation costs. By working closely with your logistics partner, you can identify areas where costs can be reduced, such as through the use of alternative transportation methods or consolidation of shipments. These cost savings can make your project more attractive to lenders and investors, helping to secure financing for your modular construction project. Get in touch to learn more about Stream Modular’s process.
Stream Modular is a transportation logistics company specializing exclusively in modular construction. We help modular manufacturers and builders transport mods, pods and panels so they arrive on time and safely to the build site.
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