How can a business fund a new building without using its own capital
A business that needs a new factory, warehouse or headquarters faces a simple question: who pays for it? Funding the build yourself ties up capital in construction for a year or more, and then in owning the finished building for decades after.
There is another option. Third party investors will fund, or commit to buy, a new building in exchange for a long lease from the business that will occupy it. The business gets a purpose-built facility; the investor gets a long term, secure income.
In this article we will look at the four main routes — forward funding, forward commitments, synthetic leases and insurance-backed capital solutions — and when each one makes sense.
What are the options?
The four routes differ mainly in when third-party capital comes in, and who carries the cost of construction until it does. Forward funds and forward commitments are open to most occupiers. Synthetic leases and insurance-backed solutions are generally reserved for businesses with an investment grade (or equivalent) covenant.
Forward fund: the investor pays for the build
In a forward fund, an investor buys the site and pays for the building in stages as the work is certified. The business agrees to take a long lease of the finished building before construction starts. It can be done on land the business already owns or on third-party land.
The business commits no capital to construction and moves into a building designed for its operations, with the headline rent and lease terms agreed up front.
The trade-off is that the building has to work for an investor as well as the occupier. It needs to be institutionally acceptable and viable, and pricing will reflect the strength of the covenant and the quality of the building. Forward funding is also typically stamp duty efficient, and many sale and leaseback investors will use it to fund expansion for tenants they already have. We explain the mechanics in more detail in What Is a Forward Fund?
Forward commitment: the investor buys on completion
In a forward commitment, an investor agrees up front to buy the new building at a fixed price once it is complete. The business, or its developer, funds and manages the build itself, then sells the finished building to the investor and leases it back.
This keeps the business in control of the construction and gives it certainty of cash at completion. Because the price is locked in early, it also protects against values falling during the build. The commitment can be agreed at any point before completion.
The cost is that the business must fund construction from its own cash flow or borrowing until completion. A fixed price also means no upside if values rise in the meantime, and the full cost of the build and fit-out may not be recovered in the sale price.
Synthetic lease: bespoke financing for large occupiers
A synthetic lease is a more sophisticated financing product, principally designed to minimise the impact on the balance sheet when raising capital. It is best suited to new builds and asset acquisitions by businesses with an investment grade (or equivalent) covenant.
The commitment is shorter than a traditional lease — typically around five years — with flexibility at the end of the term, and the financing can be tailored to include fit-out costs.
It is also relatively complex, with a longer timeline and higher advisory fees. A minimum size of around £50m is usually needed to make it financially viable, and the business carries refinancing risk when the lease ends. Synthetic leases are more common in the US, where US accounting rules treat these leases differently. Under IFRS 16, most leases come onto the balance sheet regardless (see What Is IFRS 16 and What Does It Mean for a Sale and Leaseback?), so the accounting benefit needs checking case by case.
Insurance-backed capital solutions: a different pool of capital
Insurance-backed solutions are a range of capital raising products funded by insurers (or their proxies) rather than traditional real estate investors. Depending on the structure, they can deliver equity-like treatment for the capital raised, rather than debt, or a lease with a lower balance sheet liability. They can fund new build projects as well as release capital from existing buildings.
They are best suited to large real estate portfolios looking for a specific accounting outcome, and to businesses with an investment grade (or equivalent) covenant. They are highly complex, need significant scale to be efficient and draw on a smaller pool of buyers. They also take significant management time, which is why they suit businesses that have monetised property before.
How do the four routes compare?
Forward fund | Forward commitment | Synthetic lease | Insurance-backed | |
Who funds the build | Investor | You | Funder | Insurer-backed capital |
When capital arrives | From the start, in stages | At completion | From the start | Structured case by case |
Your commitment | Long lease | Long lease | Around 5 years | Structured case by case |
Who it suits | All covenants with a viable building | All covenants able to fund the build | Investment grade or equivalent, c. £50m+ | Investment grade or equivalent, large portfolios |
Main trade-off | Building must suit an investor | You carry construction cost and risk | Complexity and refinancing risk | Complexity, scale and management time |
What this means for a business
The right route depends on three questions:
Can you fund the build yourself? If not, a forward fund keeps construction off your cash flow. If you can, and want to control the build, a forward commitment secures your exit price early.
How strong is your covenant, and how large is the project? Synthetic leases and insurance-backed solutions are generally only open to investment grade (or equivalent) businesses at significant scale.
What matters most in your accounts? If a specific balance sheet outcome is the priority, the more sophisticated structures may justify their complexity. If not, the simpler routes are usually quicker and cheaper.
Whichever route you choose, the same principles apply as in any sale and leaseback. The building needs a long-term place in your operations, and the lease terms you agree will drive the pricing.
The final word
A new building does not have to be funded from your own balance sheet. Forward funds and forward commitments are open to most occupiers and are the most widely used routes. Synthetic leases and insurance-backed solutions offer more tailored outcomes for larger, investment grade businesses. The earlier these options are considered, the more of them stay available.
Speak to Capcore if you are planning a new facility and would like to understand which routes are open to you. We would be happy to have a no-obligation discussion.
