Forward Funding Agreement Pdf

Although many investors are attracted by the potential stamp duty savings of a forward fund transaction, specific tax advice should be sought for each individual transaction to ensure full compliance with turnover requirements. There are potential cash flow benefits for a developer through the use of a term financing structure, as they typically receive money for the sale of the property in advance, rather than having to wait for the development to be completed and the final sale of the property. For the investor, term financing is likely to generate a higher return on the investment, as it will acquire the development at a higher initial return than would be possible with a forward sale. It will also be able to trade more flexibly when it comes to making changes to the system to meet the specific requirements of the investor. If there is a profit payment, it is not uncommon in term financing for the promoter to demand protection of its profit payment from the borrower. This can take the form of a guarantee or security. Most lenders would expect any collateral the borrower provides to the developer to be secondary and completely subordinate to any collateral the borrower provides to the lender. However, depending on the structure of the term financing, inter-creditor agreements between the lender and the developer may remain an essential area of negotiation between the parties. Most of the time, there is no deposit from the investor-buyer to the developer-seller at the time of signing, but it depends on the business negotiations. Still in terms of price, we often find that vacant spaces are valued at ERV (Estimated Rental Value) and that the forward purchase comes with an incentive for the developer-seller to rent the premises on pre-agreed terms and, in case of successful rental, to benefit from an earn-out within an agreed time. In a forward purchase structure, the parties agree to sign a purchase agreement, either for the shares of the company that owns properties under development, or for the property itself under the condition precedent of completion of the work (in most cases, preliminary acceptance). The transfer of ownership therefore takes place only after prior acceptance, so that the investor-buyer does not bear either the risk of construction or the risk of insolvency of the promoter-seller. It could also make it easier to finance the transaction, as this financing is negotiated most of the time before signing, but is only used after completion.

Iain Morpeth, head of Ropes & Gray`s international real estate investment and transaction practice, discusses term financing as a source of mortgages. However, the duality of the role of the borrower/promoter is a unique feature of term financing. The borrower in term financing may not have the experience or capacity or simply do not want to develop the country itself. Instead, the borrower buys the land from a seller/developer and the developer, in turn, will enter into a contract with the borrower to carry out the development. The funds lent to the borrower are then used by the borrower to pay the development costs to the developer. The usual basic documents of a term financing transaction are as follows: In a forward buying structure, due diligence is very important. The investor-buyer should (i) conduct thorough due diligence with respect to zoning/permitting and construction, including from a technical perspective, prior to signing the purchase agreement to clearly identify what they are buying, and (ii) perform confirmatory due diligence shortly before closing to ensure that the property under construction complies with the agreed construction program. The borrower and, ultimately, the lender will make sure to control cost overruns, i.e. expenses that go beyond the agreed planned cost plan (also known as the promoter`s valuation).

In a term financing transaction, there are several options for refinancing cost overruns – either through the borrower; or the Developer; or both, depending on how the agreement is structured. The goal of both sides is to ensure that development is completed on time, within budget and without gaps. A common refrain for parties who prefer a forward sale is that a forward sale keeps a developer (and their lender) more engaged than a futures fund due to the structuring of payments. However, a well-designed term fund agreement will ensure that the developer has a full incentive to deliver a high-quality product on time and within budget. Since the investor-buyer is on board early, he can adapt the development and remain involved throughout the development process. From a price perspective, we usually see the same incentives as with a forward purchase. From an economic point of view, both parties should measure the impact of advance payment on their own returns; the developer-seller who benefits from a lack of initial financing of the project, but the investor-buyer must call the capital at an early stage without generating rental income. External financing agreements are also tailor-made for this type of transaction, as the parties agree (strictly) on the conditions that must be met during the construction phase.

As a buyer or developer involved in a term financing agreement, it`s important that you stand up for your rights, make sure the details of the deal meet your needs, and avoid doing anything illegal without knowing it. The use of futures structures requires increased attention from both the investor and the buyer. A forward sale differs fundamentally in its structure from term financing, involves different payment mechanisms and can lead to significantly different tax effects. Therefore, care should be taken from the outset to ensure that this is indeed forward financing envisaged by the parties. The interaction between the FFA and the SPA can be crucial in determining the SDLT tax liability (as described above). If the contracts are linked in such a way that they effectively constitute a consolidated transaction for the sale of developed immovable property, the SDLT may be levied on both the price payable under the SPA and the amounts payable under the FFA. For example, if the developer does not deliver the land or fails to meet its obligations under the FFA, the buyer can terminate the SPA and return the property (building) to the developer. In this case, the SPA and the FFA will be linked in such a way that they will essentially be treated as a good deal. When structuring and documenting term financing agreements, expert tax advice should always be sought to mitigate this risk. “Forward funding” is to be distinguished from “Forward Sales”.

The terms “term financing” and “forward sales” are sometimes used interchangeably, but it is wrong to think of these structures as synonyms. In a forward sale transaction, an investor (looking for an investment property) enters into an agreement with a developer to acquire and retain ownership of a newly developed property once development is complete. Forward sales therefore retain characteristics similar to those of a traditional development, with the developer acting as a borrower and generally needing a financier to finance it directly for the construction of the project concerned. Once construction is complete and the premises are handed over, the developer will attempt to abandon its relationship with the investor with as much profit and risk as possible. While it is the market standard for the developer to remain in the table to monitor the completion of the default liability period under the construction contract (typically 12-18 months), the developer will subsequently argue that the investor must then rely on its suite of services and release the developer from ongoing liability. The investor will, of course, be worried. What happens if the building is suddenly plagued by defects and the contractor becomes insolvent or stops negotiating, or important members of the planning team no longer have good IP insurance? Would it be wiser to keep the use of the developer? This will be a hotly traded area and will depend on the transaction, but it is certainly true that a robust PC/removal process, as well as the delivery of a reasonable set of collateral and other documents, will provide the investor with more convenience if it allows the developer to break ties at the right time. As the Irish BTR/PRS industry continues to evolve, investors and developers will adapt transaction structures to balance their respective desires for maximum returns with the desire for a collaborative approach through development. Where developers have little history of product delivery, investors are likely to switch to forward sales structures.

However, with many developers in Ireland now having a good track record when it comes to punctuality and high performance, they are now likely to see an opportunity to move towards advanced fund structures. This is corroborated by the fact that the pool of investors participating in term financing arrangements increases with the maturity of the market. In particular, European and US investors have extensive experience in the Irish market at present, which, combined with their experience in term financing in other jurisdictions, allows them to fully weigh the benefits of a forward fund agreement as outlined above. The third essential element of a term financing agreement is the payment of profits to the promoter. In a traditional term financing contract, the developer`s profit is calculated by taking the NPV of the completed project using the actual rents earned multiplied by the agreed capitalization rate, and then subtracting the development costs plus the financing costs. The variables are the rents achieved, so these are often limited to avoid excessive deliveries, the capping rate, which can be one or more rates applied to different rental segments, the development costs where the savings benefit the developer so that restrictions are imposed on changes to the specification, and the interest rate, which is usually somewhere between an interest rate yield and the agreed cap rate. .