Why Municipalities Are Finding Non-Recourse Financing Attractive
Municipalities cannot rely on traditional means of borrowing, asking for donations or charities, or the collected revenues to fund all their projects. Thus, non-recourse financing is becoming popular and much needed. Municipalities have a duty to provide basic and auxiliary amenities for its local constituents. Using direct lenders new hospitals, schools, social halls, shopping centers and more can be funded.
May it be hospitals, schools, social halls, shopping malls, or libraries they all require huge capital investments. The national government cannot be relied for the funding since they usually have other priorities with their limited funds. In some instances, the national government takes too long to provide the much needed funds.
Non-recourse financing is becoming popular for municipalities because the lending institutions lend against the profits of real asset; or project being undertaken; and cannot take other assets as collateral, in case of default. What this means for the municipalities is that they do not risk seizure of their other properties.
Non-recourse loan or debt is a secured financing scheme where the debt is backed up by collateral in the form of a real property. The borrower though is not personally liable for such pledge. Upon default, the lender seizes the collateral as the only way to recover his investment.
In the United States of America, this is the usual financing form for residential mortgage loans. Seizures of properties occur when the project fails to repay the non-recourse debt. The borrower, therefore, has a little reprieve because they are not personally liable and the debt is limited to the collateral.
The loan is also payable after a long period of time and the capital lent is generally huge. The lenders to the municipal accordingly look as if they are getting the short end of the stick. To counter this high risks, the loans are limited to a percentage of the actual property, say 50-60%.
So the collateral value is larger than the loan granted. This is necessary as the uncertainty of revenue flow is huge, the capital given is large, and the payment period is long. Before a non-recourse loan is granted, the lender must do a lot of research and thinking things over.
The lending company must seek expertise on financial model techniques and domain knowledge to caution themselves against possible huge losses. The municipalities seeking non-recourse financing must ensure their projects are viable. Furthermore, their institutions must be credible to create confidence in lending institutions. Since getting finance for projects require a huge capital, it is becoming increasingly difficult to obtain.