Construction lending is not a larger version of a mortgage. It is a facility that pays out against progress rather than against a purchase, on an asset that does not yet exist in the form that gives it value, to a borrower whose ability to finish is the real security. Everything distinctive about it follows from those three facts.
In Spain the framework has particular features that international developers meet for the first time in the middle of a transaction, usually at the moment they were expecting to draw funds.
Nothing happens before the licence
The building licence is the first question and frequently the last. A lender will not fund construction against a plot where permission is pending, and the distinction between a licence granted, a licence applied for, and a project that merely complies with the planning instrument is one that borrowers blur and lenders never do. Some municipalities allow works to begin under a responsible declaration instead of an express licence, which shifts risk to the developer and is read by lenders accordingly.
Where the plot itself requires urban development work before it can be built on, that stage has its own costs, its own timetable and its own risk, and it does not belong inside a construction budget as a single line. A lender that finds development obligations buried in a build cost will reprice the whole facility.
The budget, and who signs it
A construction budget is credible when someone with professional liability has put their name to it. Broken down by chapter, with measured quantities, and reconciled to the project as licensed rather than to an earlier version. The two numbers that receive most scrutiny are the contingency, which is often too small, and the professional fees and taxes, which are often missing entirely.
Alongside the budget sits the works schedule. Lenders are less interested in the total duration than in what has to happen in the first quarter, because that is the period in which a project reveals whether its timetable was real.
Drawdown against certified progress
Construction facilities are drawn in tranches against certification. Progress is measured, certified by the technical team, checked by a monitor acting for the lender, and only then funded. That monitor is a cost the borrower carries and a protection the borrower should want: it is the mechanism that stops a project drawing ahead of value.
Two consequences follow. First, the developer needs working capital to be ahead of the certification cycle, since money arrives after the work rather than before it. Second, changes to the project have to be managed formally, because a variation that has not been certified is a variation that will not be funded. The same discipline applies in other jurisdictions, and our note on development and construction finance in the Netherlands sets out the comparison.
A construction lender is not funding a building. It is funding a sequence of certified steps, each of which has to be worth more than the money released against it.
Buyer deposits must be guaranteed
Where a developer takes money on account from buyers before delivery, Spanish law requires those amounts to be secured by a guarantee or insurance policy in the buyer’s favour, and held in a dedicated account. This is not optional and it is not a formality: failure here creates personal exposure for the developer and is one of the first things a lender’s counsel checks.
For a project relying on presales to demonstrate absorption, the guarantee facility is therefore part of the financing structure rather than an administrative afterthought, and its cost belongs in the budget.
Insurance and the obligations that outlive completion
Residential development in Spain carries a mandatory ten-year insurance against structural damage, which requires technical control during construction by an independent body. Arranging it late, or discovering that the technical control was not appointed at the right stage, can delay delivery and therefore the exit. Alongside it sit the building book and the first occupation licence, without which units cannot be delivered and the sales that were to repay the facility cannot complete.
How the facility is repaid
Three exits are normal: sale of the finished units, refinancing onto a long term mortgage once the asset is income producing, or sale of the completed project to an investor. Each has to be evidenced rather than asserted. Presales with guaranteed deposits evidence the first. A term sheet, or at least a defensible view of what the asset will look like to a bank once stabilised, supports the second. An indication of appetite supports the third.
The most common failure is not the building. It is the gap between practical completion and the moment money actually arrives: licences of occupation, registration of the new construction, notarial completions, and buyers arranging their own mortgages. That gap is routinely underestimated by two or three months, and a facility whose term ends at completion rather than at completion plus that gap is a facility that will need extending on the lender’s terms.
Where the structure sits
Most international developers hold Spanish projects through a company, and often through a foreign parent. That structure has to be coherent with the financing: the borrower has to be the entity that owns the asset, guarantees have to come from entities with something to guarantee with, and intragroup funding has to be documented on terms that survive scrutiny. Where a Dutch or other European holding sits above the project, the interaction with intercompany loans and guarantees matters, because a lender reads a group’s internal arrangements as evidence of how it conducts itself.
Montclare structures and arranges financing secured on European assets, and prepares the corporate and tax structure that sits behind it. Our services are set out on our services page.
This article is informational and does not constitute tax, legal or financial advice. Lending and credit intermediation are regulated activities and the treatment of any transaction depends on its facts. Each engagement is subject to scope and applicable regulation.