Recently, investment contracts for purchase of real estate have become quite popular.
Investment contract is concluded between buyers and real estate developers, usually at the construction stage of the property. In order for the developer to cover the construction cost, it attracts funds from persons who want to buy the property in the future
How are investment contracts and real estate related?
The relation is very simple – a preferential tax treatment for developers, in particular, for the incomes of joint investment institutions and transactions on derivatives sale for cash. In this regard, instead of concluding ordinary contracts of purchase and sale with buyers and paying income tax and VAT, it is more profitable for developers to sell apartments under investment contracts.
What are real estate investment contracts?
The legislation of Ukraine does not establish a single format for investment contract, but establishes the mechanisms that can be used to invest and finance the construction of residential real estate at the expense of individuals and legal entities. These mechanisms are:
- construction financing funds;
- joint investment institutions;
- issuance of target bonds of enterprises.
Transaction through construction financing fund
A fund is created to serve as a link between the buyers (investors) and the developer. Buyers enter into an investment contract with the fund, according to which they contribute money to the fund, and the fund undertakes to organize the construction of residential real estate and transfer the rights to this real estate to the buyer based on the results of construction. At the same time, the fund enters into an agreement with the developer for the construction of real estate object at the expense of buyers’ contributions.
Transaction through joint investment institution
The format is based on the purchase and sale of property rights to purchase real estate. Joint financing institution (JFI) is created, which receives initial capital from investors and signs an investment contract with the developer, according to which the JFI finances the construction step-by-step, and after the property is delivered receives property rights to it.
On the other hand, the JFI enters into contracts with buyers, according to which the buyers transfer to the JFI a part of the real estate value and the JFI undertakes to sign an analogous contract of purchase and sale of real estate with the buyers after the construction is completed.
Transaction through bond issue
The relations are concluded between the buyers and the developer with the help of an intermediary – the stock dealer. The developer issues securities that are secured by the rights to future real estate. With the help of an intermediary, the developer sells securities to the buyers, and in return receives funds for the real estate construction. Additionally, the parties sign the contract of real estate reserve. At a certain point, the buyers present the purchased bonds for demand, and in return they receive ownership rights to real estate.
In investment contracts, it is necessary to pay attention to the following terms:
- what rights does the developer have to use the land plot on which the real estate is being constructed, is the designated use of the land plot suitable for the real estate construction, does it have any encumbrances, etc.;
- whether the developer company and the fund/JFI/intermediary are affiliated persons, whether they have one or affiliated founders, etc.;
- what is the deadline for the real estate delivery, and what is the responsibility of the developer or the fund/JFI/intermediary, if such a deadline is violated, for example, full reimbursement of contributions or payment of a fine;
- for what actions the buyer is responsible, and of what kind the responsibility is;
- does the developer or the fund/JFI/intermediary have the authority to change the contract terms, the purchased apartment area, to require the buyer to pay extra money in connection with the change in the purchased apartment area, etc.;
- what time frames are set for making payments are set for the buyers and what are the consequences of missing such terms.
VigoLex team will be happy to advise you on all the tricky terms of investment contracts.
- Checking the contract edition before signing.
- Verification of all data with original documents.
- Verification of the signatories’ documents.
- Checking the availability of all documents for the contract conclusion.
- Negotiations on the transaction terms with the seller/the developer/the notary.
- Assistance in the formation of payment/payment schedule under the contract.
- Clarification on the contract terms execution.
- Approval/explanation of next steps, including ownership registration.
- Legal support of the contract signing, the lawyer’s presence at the transaction conclusion.
- Lawyer’s advice.
- Legal analysis of documents.
- Checking the legality of construction.
- Legal expertise of the contract with the seller/the developer.
- Negotiations on the terms and the procedure of the transaction conclusion with the seller/the developer/the notary.
- Providing legal reference describing the risks.
- Proposals for changes to the contract in the client’s interests.
- Lawyer’s advice.
- Checking real estate in the state registers (registration of rights, prohibitions, seizures, mortgages).
- Checking real estate owners and/or co-owners.
- Checking the seller’s powers and the documents of title for real estate.
- Study of the object history, including disputes.
- Checking the information on the persons registered in the apartment.
- Analysis of the contract and other documents.
- Drawing up a package of documents for ownership registration.
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The legislation of Ukraine provides for three types of investment contracts:
- Contract of the construction financing fund;
- Joint investment contract;
3. Contract for the emission of target bonds.
An investment contract is an agreement by which the owner of a business attracts money from third parties – investors for its development. In return, investors receive a privileged right to a share in the business or to receive interest on a loan in the future.
On the part of the business, the investment contract must be entered into by an appropriate legal entity, such as an investment fund.
On the part of the investor, the contract can be entered into by any person who is not prohibited from entering into contracts in accordance with the law.
At the moment, there is a need to register a co-financing investment contract to which a foreign investor is a party.
In their essence, these contracts are almost identical. The difference between them lies in the construction of attracting investments.
It is necessary to register an investment contract with Ministry of Economic Development.