Lately, securing financing for large-scale development projects has become increasingly complicated and nuanced. Executives looking to expand facilities or select new locations must navigate myriad challenges, from volatile capital markets to stringent investor expectations.

That’s because in 2023, capital markets encountered disruptions reminiscent of the 2008 global financial crisis. The Federal Reserve's ongoing efforts to combat inflation through interest rate hikes resulted in borrowing costs reaching their highest levels in over a decade. The cumulative effect of these measures made it extraordinarily difficult for companies and developers to secure the necessary funding for their projects. Money was essentially frozen.

For corporate executives, this tightening of capital availability means that traditional avenues for financing, such as bank loans and equity investments, are less accessible. The increased cost of capital also translates into higher project costs, making it imperative to explore alternative financing strategies and sources.

Investor Behavior and Selectivity
In this challenging environment, investors have adopted a highly selective approach to deploying their capital. Despite having significant funds at their disposal, investors are demanding higher returns to compensate for the perceived risks associated with large-scale projects. This cautious stance is driven by the need to ensure that investments are not only profitable but also resilient to economic fluctuations.

Corporate executives must present compelling business cases to attract investment. This involves demonstrating strong financial metrics, robust risk management strategies, and alignment with current market trends. Investors are particularly interested in projects that offer clear paths to high returns and have built-in safeguards against potential disruptions.

Regulatory and Economic Incentives
Federal funding programs and regulatory changes play a crucial role in mitigating some of the financing challenges. Initiatives such as the Inflation Reduction Act, the Infrastructure and Jobs Act, and the CHIPS and Science Act provide substantial support for development projects and investments in technology and certain sustainability initiatives. These programs offer financial incentives, tax breaks, and grants that can offset the higher costs of capital and make projects more attractive to investors.

Corporate executives should actively engage with these programs to maximize their benefits. Understanding the specific requirements and opportunities associated with each initiative can provide a competitive edge in securing funding and moving projects forward. Additionally, state and local economic development agencies can be valuable partners in navigating the regulatory landscape and accessing available resources to reduce project costs and increase returns. While the federal programs typically get the most media attention, the state and local offerings are more widely applicable to a larger swath of project types and often more impactful to the project’s successful implementation.

Mitigating Financing Risks
Given the current economic conditions, companies must employ strategic approaches to reduce financing risks and enhance project viability.

1. Cost Reductions
   • Cash Grants: Securing direct financial support through cash grants can significantly improve project financials. While not universally available and often tied to job creation requirements, cash grants can be a critical component of the funding mix.
   • Fee Reductions and Speed to Market: Reducing permitting fees and expediting the approval process can lower upfront costs and accelerate project timelines, making projects more appealing to investors. Securing a property’s entitlements as quickly and efficiently as possible is crucial to a development’s success.
   • Infrastructure Improvements: Preemptive site improvements, such as upgrading utilities and transportation access, can enhance site readiness and reduce project delays.
2. Leveraging Public-Private Partnerships
   • Collaborating with local governments and economic development agencies to share risks and benefits. Successful examples include projects where public entities have contributed to infrastructure costs, significantly lowering the financial burden on private developers.
3. Diversified Funding Sources
   • Combining traditional financing with alternative sources such as bonds, private equity, and public funding. This diversification can spread risk and provide a more stable financial foundation for projects.

Examples of Successful Strategies
A developer-owned property in North Carolina with prohibitive infrastructure costs sat undeveloped for years. Through a public-private partnership with the county, the site received $7 million in infrastructure development, which made further development feasible. This collaboration resulted in a $160+ million investment and the creation of 400 new jobs for the county, demonstrating the potential of public-private partnerships to overcome financing hurdles.

Similarly, an office building in Texas sat vacant for years, in desperate need of a remodel even before the current office vacancy crisis. Thanks to a novel application of a new city-level incentive designed to assist with the renovation and modernization of corporate office campuses, the developer was able to secure financing to convert the property’s use from office to industrial. This partnership provided the city with a highly desired industrial site that immediately received interest from multiple potential tenants even before construction commenced.

To be sure, the current economic landscape presents significant financing challenges for large-scale development projects, requiring corporate executives to adopt innovative strategies to secure necessary financing.

By understanding investor requirements and utilizing non-traditional strategies for reducing costs, executives can enhance the financial viability of their projects and drive successful outcomes. As the market continues to evolve, proactive and strategic approaches will be key to securing the necessary funding and achieving long-term growth.