In the case of a forward funding deal, the return is generally agreed in advance, and the overall return to the developer will often be lower to reflect the element of risk that the funder has taken in financing the development itself. Forward financing offers a solution for both borrowers and developers seeking an attractive return for a development property (although with an increase in potential risk for both parties). Reducing the LTDS for the borrower can be a huge saving. The financing of construction costs for the duration of the development, as well as a payment of profits upon completion of the building, will be very attractive to the developer. Lenders may have a higher return on investment (compared to traditional development financing). The interaction between the FFA and the BSG can be decisive in determining the tax liability on the SDLT (as explained above). If the agreements are linked in such a way that they are in fact a good consolidated deal for the sale of a developed property, the LTDS can be charged both for the price to be paid under the SPA and for all the amounts to be paid for construction work under the FFA. For example, if the developer does not deliver the land or otherwise meet its obligations under the FFA, the purchaser is able to recall the SPA and return the property (building) to the developer. In this case, the BSG and the FFA will be linked so that they are treated as a good deal on the merits. With regard to the structuring and documentation of forward financing agreements, specialized tax advice should always be obtained to reduce this risk. There are potential cash advantages for a developer in using a financing structure in advance, as he will usually receive money for the sale of the land in advance, instead of having to wait until the completion of the development and final transfer of the property. The financing at the front has a number of similarities with a traditional development finance structure – a borrower wants to acquire land and eventually build a building.
A third-party lender is often part of the scenario and helps the borrower acquire the costs of building land and funds. Before looking at the mechanics of a pre-financing transaction, it makes sense to define precisely what financing is in advance and how it differs from traditional development financing. In addition to advance financing, we also have extensive experience in advance sales. We understand that forward sales have very different risk profiles for investors and, in most cases, mean that consideration is not due until it is certain that the practical completion has taken place. From a developer`s perspective, they will look for a higher return and will be confident that, if they deliver on time, they will be able to sell the development site at an agreed price. Advance financing and advance sales can be complex, but our business approach will help you manage complexities and reduce risk and, most importantly, finalize the agreement within the agreed time frame.