Forward funding agreements for property construction

A forward funding agreement can provide a tax efficient investment opportunity, but this type of arrangement is tricky and it's important all the correct legal steps are taken.

As a buyer or a developer involved in a forward funding agreement, it is vital that you defend your rights, ensure that the details of the agreement meet your needs and avoid unknowingly doing anything unlawful.

What is forward funding?

Forward funding agreements (also known as Development Finance Agreements) are arranged when someone bankrolling the construction of a building provides interim finance to enable development to take place. It allows investors to gain access to a fixed return on their investments.

On completion, the buyer pays a final balancing payment on the value of the property, from which the value of any earlier payments are deducted.

Stamp Duty Land Tax is only charged on the value of the bare property site, rather than on the value of the built-on land, so the tax requirement is lower than in an ordinary transaction.

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What are the pitfalls of forward funding for buyers?

Buyers must beware of forward sales that look like forward funding agreements. A forward sale is a viable transaction structure, but it doesn’t offer the tax benefits afforded by a forward funding agreement. An experienced property solicitor will be able to help you to establish whether a forward funding agreement is going to be the most appropriate and beneficial structure for your transaction.

It’s worth bearing in mind some forward funding agreements hit problems when developers default on their commitments, so it is important to have contingency plans in place.

What are the pitfalls of forward funding for developers?

The main disadvantage of forward funding agreements for developers may be that the end price is fixed but the interest rates and development costs can fluctuate during the project. As such, developers can lose out if the payment agreed prior to the transaction doesn’t cover the full cost of the development.

How can a solicitor help me with my forward funding agreement?

Whether you are a buyer, seller, or a property developer, First4Lawyers can provide guidance on the forward funding process and help to ensure the deal you enter into doesn’t leave you at a legal disadvantage.

Our team of property lawyers can help buyers ensure they have watertight development obligations in place, and that the particular forward funding agreement is appropriate for the transaction. We can also protect your rights in the event the developer defaults on their commitments.

Likewise, we can help developers make sure that funding commitments from the forward funder are secured, and ensure the agreement protects your interests.

Whether you are an individual buyer or seller, or the representative of a large company that is interested in a forward funding agreement, you can contact us to discuss your needs and get help from an experienced team of property solicitors.

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