Key takeaways
- The order in which funds are used is not ranked from cheapest to most expensive. Equity is the most expensive, but it must come first because it is the risk-bearing layer that the bank needs to see.
- Cost tells you how much of each type of funding to use and for how long. The order in time is set by access to funds at each stage.
- Presale is not free money. A 5% discount in exchange for a 30% down payment received 2 years earlier carries an implied cost of about 8% a year.
A sentence that often causes confusion
Many fundraising guides conclude "use low-cost money first (equity and Presale), then use debt", while also ranking equity as the most expensive at 12–20% or more. The two statements contradict each other if you read the order as coming from cost.
The correct statement is: use equity first because it is needed, not because it is cheap; keep this equity tranche as small as the risk allows; and take it back out as early as the debt terms permit.
Cost answers the question
What share of the stack should this type of funding make up, and how long should it be left in place?
Order answers the question
On that day, which sources of funds are actually accessible, and what conditions precedent has the lender set before drawdown?
The three forces that set the actual order
- Access to funds During land purchase and permitting there is no construction work to draw against and no buyers yet. The funds available are equity and, in part, a land loan.
- Risk ranking Banks lend when the owner's money absorbs losses first, so they usually set as a condition precedent that equity must be fully injected in the required proportion first.
- Cost comes after When there is more than one option, cost decides which funding to choose.
Order by project stage
| Stage | Main funding sources | Reason | What to do |
|---|---|---|---|
| 1. Land and project preparation | Sponsor equity, part land loan | No work to draw against and no buyers yet | Limit the money committed in the highest-risk stage |
| 2. Launch Presale before construction | Remaining equity, plus booking deposits and contract deposits | Presale is the condition for the bank to start drawdown | Demonstrate market demand |
| 3. Construction | Progress-based project loan, down payments and trade credit | The loan bears interest only on the amount drawn | Use down payments before drawing more, where the terms allow |
| 4. Remaining gap | Mezzanine, Private Bond, JV | Fill the portion the bank will not provide | Set a short tenor and an exit in advance |
| 5. Transfer and exit | Transfer proceeds, refinancing or a sale into a fund | Repay debt and return capital | Repay the most expensive layer first, where the contract allows |
Some textbooks say the project loan comes before Presale; others say the reverse. Both happen in practice, depending on the facility terms. Generally, booking deposits start coming in before construction drawdown, but once construction begins, down payments and loan drawdowns come in in parallel.
Is Presale really cheap?
Presale carries no interest, but it has costs from discounts, marketing, contract cancellations and refund obligations. The cancellation rate usually allowed for is 5–15%. Some projects must use an escrow account, which means the money is not immediately available.
Example Offer an early-bird discount of 5% of the price to receive the down payment 24 months before normal sales.
Implied annual cost = ((early cash + discount) ÷ early cash)^(1 ÷ years) − 1
| Down payment to price | Discount | Duration | Implied annual cost |
|---|---|---|---|
| 30% | 5% | 2 years | 8.0% |
| 20% | 5% | 2 years | 11.8% |
This cost is close to, or higher than, bank interest. What the discount really buys is therefore not cheap money, but meeting the bank's Presale conditions and reducing sales risk.
How Presale-First closes the funding gap
Define the terms before calculating, because most confusion comes from counting Presale twice. In this article, Peak Cost is the maximum cumulative cost before transfer proceeds are received.
Equity required at the peak = Peak Cost − cumulative Presale cash − loan that can be drawn
Example Sample project with total cost of THB 1,575 m. Shareholders have THB 300 m available. Unit: THB million.
| Item | Original plan | Presale-First |
|---|---|---|
| Presale before construction starts | 40% | 60% |
| Down payments during construction | 20% | 30% |
| Peak Cost (including the additional 15 of marketing costs in the new plan) | 1,400 | 1,415 |
| Less: cumulative Presale cash at the peak | (290) | (520) |
| Less: loan drawn | (720) | (650) |
| Equity required | 390 | 245 |
| Shareholders' available funds | 300 | 300 |
| Shortfall / (surplus) | 90 | (55) |
The new plan closes the gap without needing a JV or mezzanine, and also borrows THB 70 m less. But there are trade-offs: construction starts about 6 months later, construction prices may change, and the higher down payments may lose some buyer segments.
Presale-First works when the product is good enough for customers to commit in advance, the sales team is strong, the brand is credible, the market is supportive, and flexible payment options are available.
If equity is not enough, what are the options?
| Route | Method |
|---|---|
| Add equity sources | JV, Private Equity, Family Office |
| Add debt | Expand the senior loan if the bank accepts, or add mezzanine or a shareholder loan |
| Increase Presale cash | Accelerate sales and adjust the down payment schedule |
| Reduce Peak Cost | Phase the development and apply value engineering |
| Defer expenditure | Defer FF&E, phase the marketing budget and negotiate contractor credit |
The theoretical order versus the reality of a project
Myers' (1984) pecking order theory explains that companies prefer to use internal funds first, then borrow, then issue shares. The reason is the cost of information asymmetry. The theory applies to groups with retained earnings, but a new project in an SPV has no retained earnings. Internal funds therefore come from the parent company or shareholders, which in practice means equity.
The principle that can be applied is this: the order of funds is set by what is needed first, the size of each is set by cost, and when cash comes in, repay the most expensive layer first, subject to the restrictions in the loan agreement.