Growing interest in non-bank financing instruments of project development. Because of the crisis, bank financing of many projects became unavailable or too expensive. In this situation, developers have been trying to find other ways to finance their construction, including attracting small investors groups ready to purchase the object piece by piece. As we discussed in the previous case, it is easier for developers to structure this kind of transaction as an asset deal. Popularity of Build-to-Suit projects Future buyers of premises under construction often have very strict technical and other related requirements. In this case, the parties need to sign an agreement that allows the investor to effectively monitor the construction process. The Russian laws give investors more effective tools and means to do so, while the share deal model, as a rule, cannot provide effective technical control of construction. Regional specifics Experience shows that some investors (especially regional businesspersons) are confident that a deal that secures property ownership rights is better than a deal that brings them shares of an unknown Cyprus-based company, even if it has the right to own the property.
No need to follow strict formalities (such as the State registration of the investment contract, publication of the project declaration, etc.). At the same time, this scheme contains significant legal risks for the both parties, namely: The legislation does not contain any detailed regulation of investment contracts. In case of a dispute, the Court is often confused in regulating relations between the parties concerned (there is a certain risk to see the Court applying to analogous provisions existing in construction contracts, commissions, etc.). Registration of investor's ownership rights may be complicated because the investment contracts are not considered as typical transactions by public registers.
Preliminary purchase-and-sale agreement with debt financing When using the above scheme, the parties normally conclude a preliminary purchase-and-sale agreement concerning a property under construction. They also sign a special purpose loan contract (typically, with a variable interest rate), according to which the investor starts financing the construction project. Cons of this scheme: By the date of signing a preliminary purchase-and-sale agreement, the property is under construction and thus can-
cerns the sale of "future" (non-existent) properties. The key argument against the use of the scheme concerns impossibility to accurately identify the subject of the sales agreement at the time of its conclusion. However, the Supreme Arbitration Court is currently revising a draft Resolution of the Plenum of the RF Supreme Arbitration Court concerning "The issues related to agreements of sale of the future real estate to be examined by the courts of arbitration." In case the Supreme Arbitration Court adopts the document, the scheme will actually be legalized and, obviously, will become popular in Russia. However, this model (even adopted by the above-mentioned Supreme Arbitration Court) will have disadvantages for the parties. The main drawback is that the project developer needs to register his rights to own the built facility and then to transfer the ownership title to the buyer.
Joint construction agreement Another form of investment transactions is a joint construction agreement. Pros of this scheme: The legislation contains a detailed regulation of joint construction agreements, and therefore the parties are certain about the form and content of each agreement with no possible risks arising;
Future buyers of premises under construction often have very strict technical and other related requirements. In this case, the parties need to sign an agreement that allows the investor to monitor the construction process. Given the above factors that have their impact on real estate investment transactions, we would like to describe in more detail all possible ways to structure such deals under the Russian law. In contrast to the residential market, regulations on commercial (nonresidential) real estate in Russia is quite liberal, so parties involved in such investment transactions can choose various models of contracts.
Investment contract Although the legislation does not give a certain definition of an investment contract, in practice, the investment contract is typically signed between a developer and an investor. According to such an agreement, the investor gives money to the developer, while the developer organizes construction process and then passes the built property to the investor. Key advantages of this legal scheme are as follows: Legal flexibility, as the both parties take into account every commercial and technical issue of the project implementation; No need to make the developer responsible for extra requirements (no mandatory security, no legal penalties);
not be identified exactly. There is a risk that any party may declare the preliminary agreement invalid in the future; After the construction is finished, the developer needs to register his ownership right first, and only then to sell the built property to the investor based on the general purchase-and-sale agreement. Pros of this scheme: Any special purpose loan agreement is beneficial for the both parties, as it makes the parties clearly understand circumstances and terms under which the developer should pay the money back to the investor even if their preliminary agreement is declared invalid.
Agreement of sale of the future real estate Another option that is rarely used in practice is called an agreement of sale of the future real estate. This method is based on general provisions of the Civil Code (paragraph 2 of Article 455), given that the subject of the purchase-and-sale agreement is a product to be created by the seller in the future. Efficiency of such scheme has been controversial for quite a time, as it con-
This scheme is particularly beneficial to investors because the Federal Law â„– 214-FZ generally protects the interests of those who finance construction, rather than builders. However, the use of such joint construction agreements in practice is associated with certain problems, the most important of which are: Ban to start fund raising prior to obtaining a construction permit; Necessity to implement strict formalities (i.e. State registration of agreements, development and publication of the project declaration); Impossibility to sell the premises that are classified as production facilities. Considering the above, we believe that the developer and investor of commercial real estate under construction have a wide choice of legal tools to structure their investment relations properly. Of course, each of the abovedescribed schemes has both pros and cons, but we believe that any legal analysis can bring the parties concerned to mutually beneficial cooperation models when realizing specific investment projects.
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