Project Finance (PF)

General corporate finance provides funding based on the overall creditworthiness and financial soundness of the company, whereas project finance raises funds based on the profitability and future cash flows of a specific project.

In this case, a separate special purpose company is established, and the financing structure is built around the economic viability of the project itself.

In other words, while general corporate finance rests on the responsibility of the company as a whole, project finance focuses on the individual risks and returns of the project.

What is a special purpose company?

As the substantive principal of the development project, it oversees the planning and execution of the project.

It is generally established in the form of an SPC (special purpose company) or a PFV (project financing vehicle), serving as the legal entity that carries out the project.

It is responsible for actually constructing the project and is a key participant that bears the obligation to guarantee completion.

If construction is carried out through subcontractors, disputes may arise over matters such as unpaid construction costs.

As the party that provides PF funding, it lends bridge loans in the early stage of the project and long-term funds at the main PF stage.

To recover the loan, it uses financial techniques such as securing security interests, requiring guarantees, and securitization (ABS, ABCP).

It takes on the real estate trust and handles the management and disposal of the project's assets and the execution of funds on behalf of the parties.

The real estate trust method has the advantage of increasing the transparency of funds and being favorable to the protection of creditors.

These are capital providers that participate in the PF structure through indirect investment.

They participate through a fund in the form of loans or equity investment, and the collective investment business operator and the trust business operator handle the operation and management of the fund.

As the final consumers who purchase units after completion, they contribute to realizing the profits of the project through presale contracts and payment of the presale price.

Legal disputes may arise from defects, delays, and similar issues in the presale process.

Guarantee institutions, such as the Korea Housing Guarantee, distribute risk through presale guarantees, and because various other stakeholders, including project investors, security holders, and partner companies, are also involved, legal coordination is necessary.

▶ Shareholders' Agreement

▶ Loan and Security Agreements

▶ Real Estate Security Trust and Construction Contract

A PFV, which is a special purpose company (SPC), takes the form of an entity in which the project sponsor, the contractor, investors, and others participate as shareholders.

It receives benefits under the Corporate Tax Act, so the acquisition tax and registration tax on real estate are reduced, and it is not subject to the heavier taxation rules for the metropolitan area, which is advantageous in terms of taxation.

Loan claims are converted into asset-backed securities (ABS) or asset-backed commercial paper (ABCP) to distribute financial risk and to allow a variety of investors to invest in the development project through the capital markets.

This is a method of indirect investment in the form of a real estate fund, in which an asset management company concludes a loan agreement in the name of the trustee company or acquires loan claims to participate in the development project.

REITs, which are established under the Real Estate Investment Company Act, raise funds through means such as public offerings of shares and invest in real estate development projects.

There are various types, such as CR REITs, which are aimed at corporate restructuring, and development-focused REITs.

Accurately forecasting the future cash flows that the business will generate is the most important task.

Through a profitability analysis, the capacity to repay the funding is assessed, and a scenario analysis to prepare for unexpected risks should be conducted in parallel.

As the legal entity of the project, the SPC serves to separate assets and liabilities and to limit risk.

When establishing an SPC, clear provisions on matters such as the equity structure, management control, and allocation of responsibility are necessary.

The contractual relationships among the participants, such as the developer, the contractor, the financial institution, and the trust company, must be designed carefully.

It is important to clarify the rights and obligations under each contract and to prepare in advance for how to respond if a dispute arises.

The creation of security interests and guarantee agreements is fundamental to securing the safety of PF funds.

The scope and priority of collateral and the extent of guarantee liability should be clearly defined to minimize financial risk.

Cash flow from the raising of capital through to the repayment of loans should be managed in a systematic manner.

A realistic plan for the use of funds and a repayment schedule should be established, along with measures to secure liquidity in case of emergency.

It should be reviewed whether the relevant laws and financial regulations are strictly complied with.

In particular, the structure should be designed to make the fullest possible use of institutional benefits, such as tax incentives and financial deregulation measures.