Breaking the 30% Deposit Barrier: How Developers and Modular Manufacturers Can Collaborate to Unlock Growth

Modular construction is widely recognized for its potential to revolutionize the built environment. It offers faster project timelines, reduced on-site labor costs, and improved quality control. However, one persistent challenge continues to hinder widespread adoption: the requirement for a 30% upfront deposit from manufacturers before fabrication begins.

Traditional construction loans do not accommodate this financing structure, forcing developers to inject substantial equity early in the process. This financing mismatch has slowed the uptake of modular solutions, despite their proven benefits.

The 30% Deposit Challenge: A Structural Hurdle

Understanding the Payment Gap

In traditional construction, lenders release funds in phases, tied to progress on-site. This milestone-based funding model aligns well with conventional builds but presents a challenge for modular projects, where significant work is completed off-site in a factory before site preparation even begins.

Modular manufacturers typically require a 30% deposit (or more) before production starts, followed by progress payments before delivery. The reason is simple: factories must secure materials, maintain production lines, and mitigate financial risks associated with order cancellations. However, because the work occurs off-site, traditional lenders do not recognize the modules as collateral until they are installed on-site, creating a cash flow gap for developers (Grosskopf, 2023).

This means that modular projects often require 5–10% more equity than traditional builds (National Renewable Energy Laboratory [NREL], 2023). A study by the Modular Building Institute (2023) found that a mid-sized multifamily modular project may require an additional $8 million upfront compared to a site-built equivalent. This “pay-first, build-later” model makes modular construction more capital-intensive and limits participation from smaller developers.

How Developers and Manufacturers Can Collaborate to Address Financing Barriers

1. Manufacturer-Backed Financing Programs

Some manufacturers are stepping up to bridge the financing gap by partnering with developers on risk-sharing models:

• Deferred Payment Structures: Instead of requiring full deposits upfront, manufacturers can agree to defer a portion of the payment until module delivery.
• Shared Equity Models: Manufacturers take a small equity stake in the project, reducing the upfront cash burden on developers.
• Volume-Based Discounts: Developers committing to multiple projects or long-term partnerships receive lower deposit requirements, improving financial feasibility.

One example is Factory_OS, a leading modular builder in California, which has experimented with deferred-payment options for affordable housing projects to accelerate adoption (SFHAF, 2022).

2. Modular-Specific Lending Solutions

Lenders specializing in modular construction are beginning to offer tailored financing solutions:

• Bridge Loans and Working Capital Lines: These short-term loans help cover deposit requirements until traditional construction loans kick in.
• Construction-to-Permanent Loans: A streamlined approach where the same loan funds both factory production and on-site assembly.
• Letters of Credit (LoC) and Performance Bonds: Instead of upfront cash payments, developers provide a bank-backed guarantee to modular manufacturers, ensuring payment upon delivery.

Example: Modular Capital Partners (MCP) has launched a preferred-equity solution, funding the factory deposit requirement so developers don’t have to contribute all the cash upfront (Modular Capital Partners, 2023).

3. Government-Backed Incentives and Financing

Government programs are increasingly supporting modular construction through financial incentives:

• Housing Innovation Funds: State and municipal programs offer low-interest loans to cover upfront modular costs.
• Fannie Mae and Freddie Mac Initiatives: Efforts are underway to expand secondary-market support for modular-friendly mortgages (Fannie Mae, 2023).
• Federal Grants and Tax Credits: The Inflation Reduction Act includes funding for energy-efficient prefab and modular homes (US Department of Housing and Urban Development [HUD], 2023).

For instance, San Francisco’s Housing Accelerator Fund (SFHAF) provided bridge financing for the Tahanan modular supportive housing project, covering early-stage deposits and enabling faster delivery (arcCA Digest, 2022).

4. Public-Private Partnerships (PPP) and Crowdfunding

Developers and manufacturers can partner with third parties to unlock additional funding sources:

• Impact Investors & Philanthropic Funding: Nonprofit organizations like the VBC Giving Foundation have raised charitable contributions to cover modular deposits for affordable housing projects (Volumetric Building Companies, 2022).
• Crowdfunding & Tokenization: Emerging platforms allow small investors to fund modular housing projects, reducing developers’ reliance on traditional banks (Real Estate Crowdfunding Report, 2023).

5. Certification & Risk Mitigation Programs

To build lender confidence, manufacturers are working with industry bodies to develop modular accreditation programs:

• Buildoffsite Property Assurance Scheme (BOPAS) in the UK certifies modular quality, making lenders more willing to finance factory-built components.
• The National House Building Council (NHBC) provides warranties for modular homes, reducing lender concerns over long-term durability.
• Modular Lending Guides: The National Renewable Energy Laboratory (NREL) has published reports to educate banks and lenders on modular financing mechanisms (NREL, 2023).

The more standardized and transparent the modular financing process becomes, the more likely lenders are to ease restrictions on deposit requirements.

Case Studies: Overcoming the 30% Deposit Barrier

1. Veterans Village – Philadelphia, PA

• Challenge: Raising enough upfront equity to cover modular factory deposits for a 47-unit veterans' housing project.
• Solution: The developer partnered with the VBC Giving Foundation, raising philanthropic capital to reduce reliance on traditional financing.
• Outcome: The project secured construction financing, built the modular housing off-site, and refinanced through HUD upon completion (VBC, 2022).

2. Tahanan Supportive Housing – San Francisco, CA

• Challenge: San Francisco’s public funding mechanisms couldn’t release funds early enough for modular production.
• Solution: The San Francisco Housing Accelerator Fund stepped in with bridge financing to cover modular deposits.
• Outcome: The project was completed 6 months faster than a traditional build (arcCA Digest, 2022).

3. Rise Modular – Minneapolis Multifamily

• Challenge: A modular multifamily development required 30% more upfront equity than a site-built counterpart.
• Solution: The developer used a combination of private equity, a bridge loan, and a manufacturer-backed deferred payment structure.
• Outcome: The project was completed 40% faster than conventional construction, with lower carrying costs offsetting early equity requirements (NREL, 2023).

Conclusion: The Future of Modular Construction Finance

While the 30% deposit requirement remains a challenge, strategic collaboration between developers and manufacturers is proving to be a viable solution. Through risk-sharing models, specialized lending products, government incentives, and public-private partnerships, modular construction is becoming increasingly accessible and financially sustainable.

As the industry continues to innovate, developers and manufacturers must work together to educate lenders, standardize financing models, and create a financial ecosystem that supports modular adoption at scale.

References:

• Grosskopf, K. (2023). Financing Modular Construction: Overcoming Cash Flow & Equity Challenges.
• National Renewable Energy Laboratory (2023). Challenges of Financing Modular Construction.
• Modular Capital Partners (2023). Preferred Equity for Modular Deposits.
• US Department of Housing and Urban Development (2023). Modular Financing Roadmap.
• arcCA Digest (2022). Case Study: Tahanan Modular Housing.