Understanding the Challenges of Financing Modular Construction: A Case Study for Prospective Multifamily Units

Modular construction, when compared to traditional site build, can significantly shorten construction schedules and speed income generation. Modular construction may also reduce construction costs. Yet, access to commercial financing remains one of the most significant barriers to modular construction. Materials must be purchased, and production lines reconfigured for each project months ahead of fabrication. Materials alone can be 60% or more of the total cost of production. As a result, manufacturers require large upfront deposits, often 30% or more of the off-site contract. In addition, the capital-intensive nature of modular construction requires frequent progress payments for manufacturers to maintain cash-flow. Combined with a track record of financial distress, some commercial lenders will not fund modular construction projects. For those lenders willing to fund modular projects, most require the developer to share more of the risk. This often includes the developer paying for line reservation fees and material deposits 3-6 months prior to production. As an unsecured loan, interest rates are often higher and loan amounts lower. As suppliers, modular manufacturers discourage retainage. Together, these and other factors contribute to higher equity requirements for the developer, particularly at the beginning of the project. This report and associated research attempts to contribute to this area of research interest by comparing risk and possible benefits across site and modular example project financing models. The University of Nebraska Lincoln held 10 interviews with modular manufacturers and lenders, and specific detailed projects and cash-flow analysis have been highlighted. From this, two case studies have been developed to highlight the difference between traditional site build and modular multifamily construction. The two case studies compared i) traditional site build to modular and ii) off-site builds for a 200-unit multifamily, multiunit building. The hypothesis of the case studies is that for a large commercial multi-family construction project, using modular and off-site construction can lead to time, cost savings, and better standardized build qualities, when compared to the same building built using conventional site-build techniques. Results from this case study suggest that developer’s equity requirements may be as much as 30% higher for modular construction ($18.2M) compared to site-built construction ($13.6M), particularly at the beginning of the project. For the 200-unit multifamily building, if modular construction is used compared to site build, a 6-month construction time savings is possible (15 months for modular compared to 21 months for site build). Modular developers are integrating alternative financing approaches, and partnering with local lending partners that understand the modular construction and cash flow process, suggesting solutions for the broader industry to scale. State affordable housing agencies are attempting to address some of these barriers with housing innovation funds and loans to create regional solutions. The learnings from this report will be disseminated to members of the ABC, and broader offsite financing and development communities, to help give confidence of the modular construction for multi-family buildings. As part of future research, it is recommended to continue investigation into modular construction for single family and multi-family communities e.g., Pinion Park in Colorado, and compare to multifamily multiunit buildings and potentially apply the learnings. Further research is also recommended on the development of incentives to create greater standardization and a more favorable market environment for modular construction.