Statement of changes in equity

Definition: What is a statement of changes in equity?

A statement of equity is a financial confirmation provided to the lending institution financing the real estate project, which details how much equity the project developer (client) has contributed to the project. This statement is particularly important for demonstrating to banks or investors that the developer is providing sufficient funds of its own to finance the project. The proof of equity serves as a prerequisite for loan approval and is an essential component of the financing structure of a construction or real estate project.

The Importance of the Statement of Equity in Project Management

The statement of equity is of central importance for project financing, as it provides evidence that the project developer is contributing its own funds to the project’s implementation. This evidence is important not only for the bank but also for investors, who require a transparent presentation of the sources of capital. The most important aspects include:

• Building trust: This proof demonstrates the developer's financial stability and commitment.
• Financial stability: Equity is considered the most stable source of financing, minimizing risk for banks and investors.
• Loan Approval: Without proof of equity, banks or investors generally will not approve debt financing.
• Transparency: The statement of equity provides clear and transparent documentation of financial resources.

Components of the Statement of Changes in Equity

The statement of changes in equity is typically prepared as a detailed breakdown of the equity used. Typical components include:

• List of paid invoices: A list of all invoices that have been paid using equity (e.g., land purchases, construction costs, contractor services).
• Bank statements: Proof of equity contributions to the project account or construction account, ideally recent statements from online banking.
• Account statements: Documentation of equity capital held in the form of securities or shares in special project accounts or custody accounts.
• Home savings contract: Documentation of existing home savings contracts that can be used as equity.
• Accounting documents: A list and supporting documents of the financial resources contributed to the project, including evidence of reserves or funds.
• Evidence of personal contribution: Documentation of what is known as a “labor contribution,” i.e., personal labor that is recognized as part of the equity in construction projects.

These documents are important for demonstrating to the bank or lending institution exactly how much equity is actually available and how it is being used. A complete and well-structured statement of equity strengthens the borrower’s negotiating position and increases the chances of securing favorable terms for a mortgage.

In summary, the statement of equity includes various forms of capital, such as bank deposits, securities, home savings contracts, reserves, and personal contributions, which are documented by relevant records such as bank statements, brokerage account statements, and supporting documents. These documents are essential for successfully applying for financing and for purchasing real estate or building a home.

Statement of Equity in the Real Estate and Construction Industry

In the construction and real estate industry, proof of equity is particularly important, as it ensures that the developer or builder is making a financial contribution to the project. For example, when financing new construction, renovations, or major refurbishments, banks or investors must be convinced that the developer is able to co-finance the project with its own funds before external financing can be applied for.

A well-documented statement of equity serves as proof of existing assets and invested savings and demonstrates the actual availability of funds.

Key points regarding proof of equity in construction financing:

• The documentation typically includes bank statements, copies of brokerage account statements, home savings contracts, or insurance policies.
• In certain cases, personal contributions—that is, one’s own labor (muscle equity)—may also be recognized as part of equity.
• Generally, at least 20 to 30 percent of the total cost of the property should be covered by equity, taking into account additional purchase costs such as notary and land registry fees.
• Equity can come from various sources, such as checking accounts, savings accounts, cash (when deposited into an account), securities, or gifts.
• It is important that the equity is actually available and verifiable at the time the loan is granted.

By following these guidelines, the proof of equity becomes a key consideration in construction and real estate financing. It simplifies the application and approval process and provides a solid foundation for buying a home or undertaking a construction project.

Related terms

• Proof of funding
• Equity
• Project Financing
• Capital Structure
• Loan Approval

Statement of Changes in Equity in PROBIS

PROBIS offers comprehensive features that make it easy for builders, project developers, and real estate buyers to create and manage their equity statements. The software helps users document the equity invested in a clear and transparent manner. Key features include:

• Tracking payments and equity: All payments settled with equity are reliably recorded. This allows users to keep track of their bank balances and other assets at all times.
• Clear, online banking-style presentation: PROBIS organizes all transactions and account statements in a clear and organized manner, ensuring that your financial overview remains transparent and easy to understand.
• Automated reporting and documentation: The statement of equity is generated automatically and can be provided as official documentation for banks, lending institutions, or investors. This ensures a smooth process when applying for a construction loan or real estate financing.
• Integration into project management and financing requirements: PROBIS links the statement of equity to the overall planning and monitoring of the project, including a breakdown of financing requirements and the loan amount.

With these features, PROBIS offers the ideal way to reliably demonstrate the equity ratio, manage the necessary documents and statements in a clear and organized manner, and strengthen your negotiating position with the bank or seller. This allows prospective homebuilders and homebuyers to secure their financing with greater certainty and transparency.

Conclusion: What is a statement of equity?

A statement of equity is an indispensable document for construction financing and real estate purchases. It clearly and transparently shows how much equity the developer or builder is contributing to a project. This statement is important for demonstrating financial stability and creditworthiness to banks and investors. It serves as the basis for loan applications and influences the terms and interest rates. A well-maintained statement of equity strengthens the negotiating position of buyers and project developers, as it builds trust with financial institutions and facilitates the access to funds. With PROBIS, the statement of equity can be easily created, managed, and transparently documented, which significantly simplifies the entire financing process for construction and real estate projects.