CAP funding delivers a set of advantages that usually spell out better terms, faster, and with more flexible evaluation, and thus more certain closings (assuming the parties agree and follow through) than the traditional route.
In exchange for this certainty and advantageous terms and conditions, funds are delivered in a series of monthly draws that align with typical cash flow demands of construction projects, as the various uses of funds progress from initial deposits and payments on procurement to EPC or general contractor progress payments, and so on. See below for assistance with building a Sources & Uses Statement.
Construction projects can include new or “greenfield,” renovations, expansions, refurbishment and conversions. In these situations, all the funds are not needed at the start. Our funding model allows for this, but it is more difficult for those seeking to fund acquisitions, rollups or mergers, where the bulk of capital is needed to pay the seller.
Consistent monthly draws are better aligned with new construction, retrofits and refurbishments — all have been funded through CAP with consistent monthly draws, though sometimes vendors need to be asked to be flexible. M&A-related finance is fine so long as the selling agrees to receive payment over time, or the buyer needs to use creative solutions like bridge loans, constructions loans, lines of credit or even short-term senior debt. Why short-term? Because with leverage applied to the Security Deposit (1x-4x funding in 12-15 months, best case), any debt can be repaid rapidly out of invested proceeds, which still makes good economic sense during these times of higher interest rate loans.
Why CAP’s funding model?
This is usually the point at which developers ask why we work this way, when few to nobody else does exactly this. The reason is simply because our capital partner is seen as the developer of record in the eyes of our bank, following a long history of building diverse infrastructure and renewables-related projects globally. Our bank relationship manager knows that all the funds are not needed in lump sum for any new construction projects, and to also comply with anti-money laundering (AML) and bank anti-corruption requirements, the monthly draws are pre-approved by the banker only with consistent or gradually increasing monthly amounts, with scheduled transfers contractually pre-committed, a guarantee of full funding delivery.
Depending on the leverage used, we would ask for a proposed draw schedule that uses consistent or gradually increasing amounts each month over a minimum of 12-18 months. As Security leverage increases, draw schedules that gain approval get longer. Cash surety deposits can use even more leverage than a bank-involved instrument like a Standby Letter of Credit (SbLCs are the next most popular), and with extreme leverage, such as 3x-4x, often require longer draw periods, typically 18-24 months or even longer depending on the security deposit amount relative to total funding.
See also item #7 at Safety Checkpoints for Mutual KYC when financing projects through In3
How to construct a Uses of Funds & Drawdown Schedule
Based on your MS Excel financial modeling, the real-world cash demands for your project serve as the basis for monthly draws. Divide the required funds over the course of each year on a monthly basis, keeping the initial draws (critically important during the first 3-4 months) as low as possible.
See In3’s guide to building a Sources & Uses Statement and Monthly Draw Schedule with several illustrative examples:
A proposed monthly schedule that is certain to gain approval uses the exact same amount each month for minimum 10 or 11 months out of each annual period. The total number of months required to complete all the draws of invested proceeds depends on the amount of leverage used for the security. Ask us if you are uncertain.