Special situations in Indian real estate: the completion gap

The tension between statutory completion timelines and lender exit expectations has produced a class of project that is commercially viable and financially stranded, which neither a conventional lender nor an equity investor is equipped to fund.

The mechanics are consistent enough to describe as a pattern. A residential project is financed by a non-banking financial company on a three to four year view. Construction runs behind that view, for reasons that are usually a combination of approval timing and the developer's own liquidity rather than demand. The regulatory completion obligation to buyers does not move. The lender's fund life does. At some point the lender needs an exit that the project cannot yet generate, and the developer needs eighteen to thirty months of construction funding that the incumbent lender will not extend.

What is left is a project with sold inventory, a receivable book from existing buyers, a construction programme that can be costed, and no available capital. The underlying asset is not impaired. The capital structure around it has run out of time.

The underlying asset is not impaired. The capital structure around it has run out of time.

Why the obvious sources do not fit

A bank will not write this exposure. The borrower is under existing lender pressure, the security is already charged, and the credit committee has no template for a facility whose repayment depends on a construction programme completing. An equity investor will look, and will then price for the developer's residual position rather than the project's, which is a discount most promoters will not accept while the project still has value in it.

The gap is filled by structured credit, and only when it is structured around three specific features.

The three features that make it fundable

The first is a ring-fenced special purpose vehicle. The project's cash flows and the new facility have to be separated from the developer's other projects, so the incoming lender is exposed to this construction programme and nothing else. Without this, the diligence question becomes the developer's whole balance sheet, and the answer is usually no.

The second is milestone-linked disbursal. Capital releases against certified construction progress rather than in a lump sum. This aligns the lender's exposure with the only thing that actually retires it, which is completion, and it removes the diversion risk that makes this asset class difficult to underwrite.

The third is a defined position relative to the incumbent lender. Either the existing exposure is taken out, or an intercreditor arrangement sets out how the receivable waterfall is shared and who controls enforcement. Facilities that leave this unresolved fail at documentation, after both sides have spent three months on them.

What this means at origination

For a developer, the practical implication is that the negotiation with the incumbent lender has to start before, not after, the search for replacement capital. A structured credit provider will not commit against an intercreditor position that has not been discussed. For a credit fund, the implication is that the diligence effort sits in the construction programme and the buyer receivable book rather than in the developer's audited accounts, which is a different exercise from the one most credit teams are staffed for.