Use of Collective Investment Institutions (CII) in projects for real estate construction
Part 2: investment contracts
We consider the model with the use of investment contracts, which allows attracting the investment money of natural persons and implementing the construction project with minimum expenses and tax consequences.
In addition to the model with forward contracts, which was discussed in the first part “CII in projects of real estate construction – forward contracts”, it is possible to organize financing a construction project using some investment contracts, which are concluded between a developer, CII and end owners of real estate.
A venture corporate investment fund (hereinafter referred to as CIF) or share investment fund (hereinafter referred to as SIF) is established at the preliminary stage. CII shall be “working” with formed initial authorized capital and allotted shares for collective investment. Read about it in more details in material “How quickly to register a CIF”. The founder of investment fund may be a developer itself or the investors, who are not affiliated with it. The investment money, attracted through CII, allows starting the construction.
The first step (#1) in implementation of the model is the conclusion of investment contract (C1) between a developer and a collective investment institution. CII undertakes to finance the construction at the expense of investment money that belongs to the fund, which it has received from allotted shares or investment certificates among its investors. In its turn, a developer transfers the property rights in purchase of real estate in the future (time X) to CII. This contract fixes the important moment – as soon as the real estate is constructed, CII will become its first owner.
At the next stage (#2) CII concludes investment contracts (C2) with natural persons – end buyers of real estate. The subject of contract again is the right in purchase of property rights in real estate. The interrelations between CII and end buyer are the combination of two contracts. The mechanism is as it follows: firstly the investment contract (C2) is concluded, which parties, in the future, on a certain period (time Y), undertake to conclude the main contract (C3) pursuant to the terms, established by investment contract (C2). However, the end users receive the right to purchase the property rights in real estate at CII already at its market cost (M2). Besides, the buyers pay the part of cost for real estate with money – make the investment contribution. Time Y occurs after time X.
The mechanism of investment contract allows organizing the payment for real estate by installments according to financial needs of developer. Accordingly, a developer receives money (M1) with portions pursuant to approved schedule of payments and construction schedule.
The active financial transactions are held between natural persons, CII and a developer during the whole construction period. The buyers of apartments come both at early and final stage in implementation of construction project, and an individual investment contract is concluded per each apartment. The buyer of apartment pays money (M2) to the accounts of CII; the fund uses this money for further investment activity or, in case of current obligations to developer, transfers the money according to the schedule of construction finance, which is mentioned in investment contract (C1). Income (M3) – the difference between construction costs and market cost of real estate – is left at CII. This money is released from taxes and may be reinvested into new projects or paid out to participants in CII in the form of dividends.
The third stage (#3) starts after a building has already been built. Time X occurs when the property rights for already built real estate transfer to CII (fulfillment of terms in contract C1). All apartments are passed to the balance of investment fund. The final settlement between CII and a developer takes place – CII pays the sum M1 in full.
The final step (#4) – signing a notary contract (C3) for sale and purchase of real estate item between CII and end owner. If all the parties fulfilled their obligations, a natural person acquires the ownership in apartment. All the terms, according to which the main contract should be signed, shall be fixed still in step #2 in investment contract (C2). In particular, the date to put a building into operation and the date to conclude the main agreement shall be specified. The date when an end owner should be informed about signing the main contract shall be also mentioned. The investment contract compulsorily has the article, where CII is obliged to conclude a notary sale and purchase contract with an end buyer of real estate. The cost of apartment (M2) for an end buyer remains unchanged, and it is fixed still at the stage when investment contract (C2) is concluded.
The well detailed contract undoubtedly protects a natural person and its investment.