How to Prepare for Bank Due Diligence in Czech Real Estate Development

Are you planning a development project and seeking bank financing? Then you must know that preparing for bank due diligence is the most critical phase of your investment in the Czech Republic. Banks do not just check the numbers – they examine every detail of the project, from legal titles and project permits to financial models. In this article, our Prague-based attorneys will show you exactly what banks want to see and how to prepare so that you obtain financing under Czech legislation without unnecessary delays.

Why preparation for bank due diligence is critical for your project

Bank due diligence is not mere administration. It is an in-depth audit that determines whether a bank will finance the project at all. Unlike financial investors who focus primarily on potential returns, banks examine the entire legal, technical, and economic ecosystem of your project in the Czech Republic. Their goal is to minimize risk – and this approach can either approve your project or block it for months.

The reality is that a seemingly ready project often hides risks that only emerge during due diligence. For example, missing permits, incorrect entries in the Czech Land Registry, hidden easements, or legal defects in corporate documentation can completely freeze a project. The attorneys at ARROWS law firm in Prague have long specialized in these issues and handle them regularly in practice.

What banks actually check during due diligence

Bank due diligence consists of several independent but interdependent audits. Each has its own logic and objective, and each can either advance or halt your project.

Legal due diligence – the foundation of everything

Legal review is the fundamental stage where banks verify whether you own the land or building you wish to finance and whether your ownership title is indisputable. Banks do not perform a superficial check of the title deed; they analyze the history of acquisition titles, often going back 10 to 20 years. They look for hidden liens, easements, foreclosures, or other legal obstacles that could jeopardize their security under Czech law.

A crucial factor is that in development projects, land is often purchased through a Special Purpose Vehicle (SPV). In such cases, the bank does not just check the property, but also the company itself, its history, owners, accounting, and all contracts the company has entered into.

Our Prague-based attorneys at ARROWS know that corporate documentation often hides problematic provisions that banks cannot accept. These include change-of-control clauses that would allow a third party to block matters, or existing unrecorded liability relationships.

Technical and construction due diligence

Here, banks are interested in whether the project is technically feasible and meets all legal requirements under Czech legislation. They check valid permits (a "permit for a project" under the new Czech Building Act; for older projects, zoning decisions and building permits). Banks also commission a technical assessment of the project documentation to ensure it is high-quality, error-free, and realistic.

The risk here lies in the fact that project documentation often contains errors that only manifest during construction. Significant defects in the project can lead to additional costs not included in the bank budget, thereby jeopardizing financing approval.

Financial due diligence and cash flow

The bank verifies whether your financial model is realistic. It examines the project budget, cash flow, expected returns, and specifically the indicators it cares about: LTV (Loan to Value), LTC (Loan to Cost), and DSCR (Debt Service Coverage Ratio). Essentially, the bank wants to see if you have enough equity and if the project generates sufficient cash to service the debt.

Banks pay special attention to pre-sales—contracts with buyers who have reserved an apartment or property before construction is completed. Banks usually require a certain percentage (often 20–30% of expected revenue) to be secured by pre-sales before the construction loan can be drawn.

Practical preparation: Documentation required by the bank

To be specific, there is a standard list of documents without which banks will not consider your project. This is not just paperwork – each of these documents plays a role in the bank's decision-making process.

Basic legal documentation

The bank will obtain an up-to-date title deed itself, but you must provide complete acquisition titles (purchase agreements, registration documents) proving your right to execute the work. Documentation confirming that previous transfers were legally valid, including historical titles, is particularly important.

If you are executing the project through an SPV, you must submit the foundation deed/articles of association and an extract from the Czech Register of Beneficial Owners. Missing or incomplete legal documentation can lead to the bank suspending the entire transaction and requesting supplements, causing delays of several months.

Construction documentation and permits

You must possess a valid public law authorization for construction, which under the new Czech Building Act is the "permit for a project" (povolení záměru). For older projects, we still encounter combinations of zoning decisions and building permits. The bank will check this with particular care – verifying that the permit is final and that its validity has not expired.

We often see the impact of the recodification of Czech building law here, as the new regulations have been effective for all structures since July 2024. Our Czech legal team at ARROWS daily handles cases where clients hold permits issued under old legislation, and the bank wants to verify if they remain enforceable under the new conditions.

FAQ – Legal tips for construction documentation

1. How long is a building permit valid for a bank to still accept it?
According to the new Czech Building Act, a project permit is valid for 5 years from the date it becomes final (with the possibility of extension). If you have exceeded this period without starting construction, the permit has expired and the bank will refuse financing. If you are facing a similar issue, contact us at office@arws.cz.

2. Do I need to have a building permit before applying for financing?
Ideally yes, but not always, as banks sometimes start the approval process for projects that do not yet have a final permit if the quality of the project documentation is high. However, drawing the loan is almost always conditional on the permit becoming legally final. For specific advice, please contact the ARROWS law firm in Prague at office@arws.cz.

3. What if the Building Act changed after I already obtained an older permit?
Permits issued under previous Czech legislation remain valid, but banks verify whether the validity period has expired without commencement of works.

Financial Documentation and Business Plan

The bank requires a detailed business plan with cash flow projections for the entire duration of the loan. 

This must include a detailed cost budget broken down by construction phases, where the bank will pay particular attention to the "cost overrun" item (contingency for extra work). Our Prague-based attorneys at ARROWS specialize in how to fix prices in contractual documentation with suppliers so that significant budget overruns are not possible under Czech commercial law.

Documents from Suppliers and Business Partners

The bank also requires contracts with the general contractor, designer, and other key partners. Here, they focus specifically on whether there are any unexpected conditions in these contracts, such as inflation clauses, which could jeopardize the budget.

Contracts with architects and designers are particularly important, where the bank monitors authorizations for the given type of project in the Czech Republic. Professional liability insurance for these professionals and assurance that the designer bears responsibility for defects in the project documentation are also crucial.

Preparing the SPV Structure – A Critical Step Often Overlooked

If you are purchasing land or a project through a Special Purpose Vehicle (SPV), preparing this structure is an integral part of due diligence preparation. Banks commonly require an SPV structure – the goal is to have a clear overview of the project asset ownership and to effectively control cash flow separately from your other activities.

The SPV must be established correctly and with regard to future financing requirements. The bank will verify that the company was established specifically for this purpose, that it carries no historical debts, and that there are no hidden owners or liabilities under the Czech legal system.

We often encounter situations where entrepreneurs set up SPVs on their own without consulting legal experts, leading to errors in records and documentation. Our Prague-based attorneys at ARROWS ensure the professional establishment and setup of SPV structures, including all contracts and shareholder agreements required by banks.

Due Diligence as a Process: Step-by-Step Preparation Phases

Preparing for due diligence is not a one-time event, but a process that evolves over time with sequential phases. Understanding this process will help you plan your time and resources effectively.

Phase 1: Preliminary Legal Audit

Before diving into a detailed review or commissioning an expensive economic study, you should have a quick legal pre-check performed. ARROWS law firm in Prague calls this service a "Red Flag Report" – an output that identifies major legal obstacles within a few business days.

The goal is to determine if the project has legal potential before you invest time in more detailed analyses. Our Czech legal team will verify compliance with the local zoning plan, check territorial limits, and highlight obvious legal defects.

Phase 2: In-depth Legal Due Diligence

Once the project passes the Red Flag Report without major obstacles, a full legal due diligence follows. This examines all legal aspects – from the status in the Czech Land Registry to the corporate structure and all contracts affecting the project.

During this phase, our attorneys in Prague focus on several critical areas, such as ownership history and easements. They specifically target hidden liabilities – tax arrears, ongoing litigation in Czech courts, employment law issues, or other debts.

Phase 3: Environmental and Technical Due Diligence

The bank may also request an Environmental Site Assessment, especially if the project is being implemented on a site with an industrial history (brownfield). The concern is whether the land is contaminated, which would require expensive remediation.

Technical due diligence then includes checking the quality of project documentation, geological surveys, and the budget. Both of these due diligence processes are performed by specialists usually selected or approved by the bank, and your role is to ensure cooperation.

Contact our specialists at ARROWS law firm in Prague: 

Phase 4: Preparation of Final Contractual Documentation

Once all due diligence is passed, the preparation of the final loan agreement and security documentation follows. A loan agreement in project financing is not just a document with an interest rate, but a detailed manual on how the bank will monitor the project.

Our Prague-based attorneys specialize in reviewing these contracts with the aim of negotiating terms that are achievable for you. It is about balancing the requirements of both parties, where any error could lead to future sanctions or, in extreme cases, the acceleration of the loan.

Key Indicators Assessed by Banks – and How to Address Them

To be specific, banks assess your project through several numerical indicators. If you do not understand these metrics, there is a high risk that your project will not be approved.

LTV and LTC – Loan-to-Value and Loan-to-Cost Ratios

LTV (Loan to Value) expresses the ratio between the loan amount and the future market value of the property, while LTC (Loan to Cost) expresses the ratio of the loan to the total investment costs. Banks in the Czech Republic standardly finance up to 60–75% of costs (LTC) for development, meaning you must cover the remaining 25–40% from your own resources.

The lower the LTV or LTC you request, the better the interest rate you can negotiate, as the bank carries less risk. 

FAQ – Legal Tips for Financial Indicators

1. What is the ideal DSCR for a bank to approve financing?
Banks are generally satisfied with a DSCR above 1.20, but it is safer to aim for 1.25–1.30. If you calculate your model with a borderline value, you risk failing to meet the condition if interest rates rise slightly or rents decrease. If you are unsure about setting up your model, contact ARROWS law firm at office@arws.cz.

2. Can the bank request a change in DSCR during the process?
Yes, the bank may tighten its requirements (request a higher DSCR) if it evaluates the project as riskier.

3. What if my project does not meet the required DSCR?
It is not an automatic "no," as banks sometimes accept a lower DSCR if you offer additional security or reduce the LTV (inject more equity). 

DSCR – The Project's Ability to Repay

DSCR (Debt Service Coverage Ratio) is an indicator that measures whether the project generates enough money to repay the loan; it is the ratio of net operating income to debt service. Banks usually require a DSCR of at least 1.2 to 1.3, representing a 20–30% reserve above the required repayments.

In practice, this means that if the annual loan repayment is 1 million CZK, the project must generate a net income of at least 1.2 million CZK. Our Czech legal team notes that many developers underestimate operating costs or overestimate rents in their calculations, creating an unrealistic picture.

IRR and NPV – Return on Investment for You

IRR (Internal Rate of Return) measures the effective profitability of the project, with development investors often targeting an IRR above 15%. The bank monitors this indicator primarily to see if the project is sufficiently motivating for the developer.

NPV (Net Present Value) then measures the absolute contribution of the project in monetary terms. These indicators are key for your investment decisions, and if the project does not show positive figures with a sufficient reserve, the bank will not take the risk.

The Risks of Insufficient Due Diligence Preparation

Risks and Sanctions	How ARROWS Assists (office@arws.cz)
Rejection of financing due to legal defects: Missing building permits, incorrect entries in the Land Registry, or hidden easements can lead to a bank refusing financing without further discussion.	Legal due diligence: Our Prague-based law firm performs an in-depth audit of all legal aspects, uncovering hidden issues and ensuring their resolution before the financing application is even submitted.
Delays in financing proceedings: Missing documents, incomplete legal records, or unclear ownership relations can lead to months of delay. Every month of delay means a lower IRR and increased financing costs.	Comprehensive documentation preparation: Our Czech legal team ensures that all documents are completed and prepared so that the bank does not need to request additional information.
Hidden liabilities and debts: If you are purchasing a project through an SPV, it may contain old debts or disputes. The bank will discover this during due diligence and will not provide financing.	Corporate structure analysis: ARROWS attorneys in Prague check all legal relationships within the SPV, identify hidden liabilities, and ensure they are addressed in the transaction documentation (SPA).
Issues with construction documentation: Project documentation contains errors or a permit has expired. The bank will detect this and may require a new permitting process under Czech law.	Legal permit review: Our Prague-based law firm verifies the validity and enforceability of project permits and their compliance with current Czech regulations.
Financial model loses credibility: The cash flow prediction contains unrealistic assumptions. The bank will reject the model and deny financing.	Legal review of model inputs: Our attorneys check whether the financial model accounts for legal risks and contractual obligations that affect cash flow under Czech commercial law.
Risk of unfavorable covenants: The loan agreement contains overly strict covenants that will restrict you in managing the project.	Negotiation of banking terms: Our Prague-based attorneys will help you negotiate flexible terms that protect the bank without paralyzing your business operations in the Czech Republic.

Contract preparation – what must be negotiated before due diligence

Banks do not just look at numbers – they scrutinize contracts with particular care. These are the legal documents upon which their security rests.

Works Contract with the General Contractor

This contract is critical because the bank will analyze it word for word. It looks specifically for price provisions – whether the price is fixed or if there are mechanisms that could increase it. It will pay close attention to "change of circumstances" clauses, which may allow the contractor to demand a price increase under the Czech Civil Code.

The bank will prefer a fixed-price contract or one with clearly capped inflation clauses. Our Czech legal team specializes in the legal handling of contractor agreements – ensuring that risks are clearly distributed between you and the contractor.

Lease Agreements and Future Purchase Agreements

For projects where a sale is planned, the bank requires Agreements on Future Purchase Contracts (SoSBK) to prove market interest. These contracts must be legally enforceable, and for rental projects, future lease agreements are submitted.

It is particularly important that these contracts contain provisions allowing the developer to reasonably postpone the project completion date. The bank knows that construction in the Czech Republic can face delays and wants to be sure that clients will not withdraw at the first sign of a delay.

Shareholder and Partnership Agreements

If the project is realized in partnership or with multiple investors (JV – Joint Venture), the bank will request a shareholder agreement. It will verify that relations between partners are stable and that there is no risk of a "deadlock" that would halt the project. The bank also monitors whether mechanisms exist for additional capital injections if the project requires more funds.

Timeline: How long the preparation takes

Let’s be realistic: preparing for due diligence and subsequent approval is not something you can manage in two weeks. It is a process that takes months and requires careful planning.

Months 1–2: Legal pre-check (Red Flag Report) and business plan preparation. If you uncover major obstacles at this stage, you will save on further costs.

Months 2–3: Completion of documentation, resolution of identified defects, negotiations with technical advisors, and approaching banks (term sheet).

Months 3–5: In-depth bank due diligence (legal, technical, valuation), and approval within the bank (Risk department). Overall, expect that 3–6 months will usually pass from the first contact with the bank to the first drawdown of funds.

Months 5–6: Preparation and negotiation of loan documentation (LMA) and fulfillment of drawdown conditions.

Our attorneys in Prague routinely manage this agenda and are able to accelerate the process thanks to their knowledge of Czech banking standards.

Mezzanine financing – when bank loans are not enough

If a bank finances, for example, only 60–65% of costs and you do not have enough equity for the rest, there is a solution: mezzanine financing. This is subordinated debt – more expensive, but allowing for higher leverage.

The mezzanine lender accepts higher risk and expects a higher return in exchange – typically an interest rate of 10–15% p.a. Mezzanine financing is legally complex, and the bank will require an Intercreditor Agreement, which precisely defines the hierarchy of payments and rights between the bank and the mezzanine lender.

Our Prague-based attorneys specialize in preparing these complex financial structures – ensuring that the Intercreditor Agreement is acceptable to the bank and secure for you.

Executive summary for management

Preparing a development project for bank due diligence in the Czech Republic requires a systematic approach. Here are the key points for your decision-making:

1. Legal vetting must precede financial modeling. Cutting time on legal checks does not save money – on the contrary, legal risks discovered at a later stage can block the project.
2. The financial model must be based on realistic assumptions, as underestimating costs or overestimating revenues leads to rejection.
3. The SPV structure must be clean. Hidden defects in corporate documentation or historical liabilities in the SPV lead to delays.
4. Contractual documentation is the foundation, as contracts with contractors and future clients are the primary security for loan repayment and must be bulletproof.
5. Delegating to specialists minimizes risk. Our attorneys at ARROWS have extensive experience and high insurance coverage in the hundreds of millions of CZK, providing essential security for large-scale projects.

Final Recommendation

Preparing a development project for bank due diligence is a demanding process where mistakes are not forgiven. Every legal or financial inaccuracy can cost you precious time or lead to a loan rejection. Only rigorous and professional preparation will ensure you obtain financing under favorable conditions within the Czech market.

The attorneys at ARROWS law firm in Prague have long been dedicated to these issues and handle them routinely in their daily practice. Their extensive experience in project financing and international reach will help you navigate your project safely. The ARROWS law firm portfolio includes hundreds of corporate clients and municipalities, representing deep practical knowledge of the Czech market.

It does not matter whether you are handling your first development project or managing an extensive portfolio – ARROWS law firm is interested in compelling business ideas and investment opportunities in the Czech Republic.

Do not hesitate to contact our Prague-based law firm at office@arws.cz to have a legal assessment of your project prepared – it is the most reliable path to securing bank financing.

FAQ – Most frequent legal questions regarding development project preparation for due diligence

1. How long does legal due diligence take?
For simple real estate transactions in the Czech Republic, it standardly takes 2–3 weeks. If you are purchasing a project as a share deal, the review usually takes 3–6 weeks depending on the quality of the documentation. If issues arise, the timeline extends. For an audit of your project, contact our Czech legal team at office@arws.cz.

2. What level of equity do I need?
Banks in the Czech Republic currently standardly require a developer to contribute 25–40% of the total project costs from their own resources. The higher the equity, the lower the bank's margin. If you lack sufficient own resources, mezzanine financing or the entry of an investment partner can be considered.

3. What if a legal defect is found during due diligence?
A defect does not automatically mean the end of a deal, as it can often be rectified by removing an old easement or concluding an amendment to a contract. Our attorneys in Prague will help you find a constructive solution or address the defect through a purchase price discount – write to us at office@arws.cz.

4. Do I need a building permit before applying for a loan?
For initial negotiations with a bank, a high-quality project and zoning study or a submitted application are often sufficient. However, for loan approval and contract signing, a final permit (decision on the project) under Czech construction law is usually a mandatory condition. An exception may be financing the purchase of land with a permit process in progress.

5. What are covenants?
Covenants are contractual obligations to the bank, which can be financial (e.g., maintaining a certain DSCR) or non-financial (e.g., a ban on selling shares). Their breach can lead to sanctions or the loan being called due. Setting the correct covenants is a key part of negotiating a credit agreement under Czech law.

6. What are the specifics of financing a "right to build" (právo stavby)?
The "right to build" is a temporary in rem right under the Czech Civil Code, and the bank will examine what happens to the structure after it expires. The bank's security interest must encumber the right to build itself, which is legally more complex than land ownership and requires precise contractual handling. For advice, contact office@arws.cz.

Disclaimer: The information contained in this article is for general informative purposes only and serves as a basic orientation on the issue. Although we ensure maximum accuracy of the content, legal regulations and their interpretation evolve over time. To verify the current wording of Czech legislation and its application to your specific situation, it is essential to contact ARROWS law firm directly (office@arws.cz). We bear no responsibility for any damages or complications arising from the independent use of information from this article without our prior individual legal consultation and professional assessment. Every case requires a tailor-made solution; therefore, do not hesitate to reach out to us.