CII in projects of real estate construction – forward contracts
Part 1: forward contracts
Including CII into the model to finance a project for construction of residential real estate will allow a developer planning the tax load, and, possibly, avoiding the force majeure circumstances, related to deficit of current assets. Let’s consider the most comfortable model for all parties – a forward contract.
CII in projects of real estate construction
Forward contracts are the most progressive models to finance the construction using CII among all forms that exist at present moment. A developer, CII or an ultimate owner of real estate receive some additional guarantee for honest fulfillment of contractual obligations by other parties.
The risk for conclusion of some contracts for the same real estate item is reduced for an ultimate owner as the whole detailed information about apartment is mentioned in exchange-traded contract.
This model for CII is convenient by the fact that the investment fund takes part in contract only until the moment for sale of forward to a natural person – ultimate owner (Pic.1). This means that a developer accepts the whole responsibility for timely putting into operation a building and transfer of apartments to their ultimate owners.
A developer receives the stable scheme for attraction of finances and unique opportunities for tax planning. The model is absolutely legal and does not cause to any disputes among lawyers.
CII (venture CIF or SIF) is established at the preparatory stage in implementation of model. CII, which is under “working” conditions, shall have formed the initial authorized capital and placed the shares for collective investment. Read the more details in article “How quickly to register a CIF”.
A developer (legal entity) may be a direct founder (participant) in investment fund or control its activity through affiliated persons. However, the investors, by no way affiliated with a developer, may establish a fund and form its authorized capital. The founders of CII may be natural persons, both affiliated and not affiliated with developer. The investment money, attracted by CII, will allow starting the construction.
The first main step (#1) in implementation of such model for finance is the registration of forward contract at commodity exchange. The parties under contract are CII and a developer. A developer undertakes during established period (time X) to deliver the property rights in real estate item, and CII – to pay a certain price (M1) for this item. As a rule, the price, fixed in contract, is the nominal cost of real estate item. Its own forward contract is registered for each individual apartment.
A forward contract is a contract, according to which a developer due to established period (in the future) undertakes to deliver a real estate item to an investor-buyer of apartment. On its part, a buyer undertakes to pay the sum, mentioned in contract, in order to receive the ownership in apartment.
It is important to understand that the property rights in real estate do not belong to CII at the moment when a forward is registered at commodity exchange. A forward contract grants only the right to purchase the property rights in real estate in the future due to the price, fixed in contract. However, a forward contract itself may be a subject of agreement. A person, who possesses this derivative, may sell it.
The next step (#2) is that CII sells a forward contract to a natural person – future owner of apartment. This also takes place at the commodity exchange and is executed as the sale and purchase agreement of forward contract. But a forward contract is already sold due to the price, which includes the market cost of real estate. Buying a forward contract, a future owner of real estate acquires the right for conclusion of investment contract with a developer for purchase of apartment due to price M1 (nominal cost of real estate). A natural person is to pay sum M2 to CII for purchase of forward contract itself. Thus, the expenses of a future owner of apartment consist of two numbers: M1 and M2. An owner pays sum M1 to a developer at the stage for fulfillment of forward contract (time X).
The money, received from sale of forward contracts to a natural person, according to norms of Tax Code, is not levied with income tax. Besides, the transaction is not a subject of VAT taxation. Such legislative preferences form a nice basis for tax planning.
After construction is completed and an item is put into operation, the period (time X) for fulfillment of forward contract (#3) comes. A developer and a natural person conclude the main contract, under which a developer delivers the apartment to an owner pursuant to property rights, stipulated in forward contract. An owner of apartment pays sum (M1) to a developer. A forward contract firstly mentions such important parameters as period of payment, periods for completion of construction and putting an item into operation, number of apartment, metric area, etc. Thus, an ultimate owner rather exactly understands for what he/she pays the money.
Money M2, which are accumulated in CII, is in fact the profit of developer. Further this money may be re-invested into new projects or paid to participants in CII in the form of dividends.