Forward Funding Agreement: A Practical Law Guide
A forward funding agreement (FFA) is a legal contract between a developer and an investor, usually a property investment company or a pension fund, for the financing of a commercial real estate development project. The FFA establishes the terms of the financing, the conditions of the construction, and the transfer of the completed property to the investor.
In this practical law guide, we will explore the key aspects of a FFA and the relevant legal considerations for both the developer and the investor.
Key aspects of a Forward Funding Agreement
1. The financing structure
The FFA typically involves the investor providing the developer with the funding required to construct the property, in exchange for the transfer of the completed property. The funding may be provided in stages or in a lump sum, depending on the specific terms of the FFA. This structure allows the developer to avoid the need for upfront capital, while allowing the investor to secure a property at a fixed price.
2. Construction conditions
The FFA sets out the conditions of the construction, including the timeframe for completion, quality specifications, and any specific requirements of the investor. The developer is responsible for meeting these conditions and delivering the property on time and to the expected standard.
3. Transfer of ownership
Once the property is completed, ownership is transferred from the developer to the investor. This is typically done through a sale and purchase agreement, which sets out the final sale price and any conditions of the transfer.
Legal considerations for the developer
1. Due diligence
Before entering into a FFA, the developer should conduct thorough due diligence on the investor and their financial capacity to provide the required funding. This may involve verifying the investor’s financial statements, reviewing their track record of successful investments, and assessing their creditworthiness.
2. Contract negotiations
The FFA should be negotiated carefully to ensure that the terms are fair and reasonable for both parties. The developer should seek legal advice to ensure that they are not agreeing to terms that are detrimental to their interests, such as onerous construction conditions or unreasonable transfer conditions.
3. Performance obligations
The FFA will likely include performance obligations for the developer, such as delivering the property on time and to the agreed quality standards. The developer should ensure that they have the necessary resources and expertise to meet these obligations, and that they have appropriate insurance in place to mitigate any risks associated with construction.
Legal considerations for the investor
1. Risk assessment
The investor should conduct a thorough risk assessment of the development project before entering into the FFA. This may involve reviewing the developer’s experience and track record, assessing the market demand for the property, and conducting a feasibility study to assess the financial viability of the project.
2. Exit strategy
The investor should have a clear exit strategy in place before entering into the FFA. This may involve setting a target price for the sale of the completed property, identifying potential buyers, or considering whether to retain ownership of the property for rental income.
3. Legal documentation
The investor should ensure that all legal documentation associated with the FFA, such as the sale and purchase agreement, is drafted carefully to protect their interests. They should seek legal advice to ensure that the terms are fair and reasonable, and that they have sufficient protections in place in case of breach of contract or other contingencies.
Forward funding agreements can be a valuable financing option for commercial real estate developers and property investors. However, it is important to approach these agreements with careful consideration and to seek legal advice to ensure that the terms of the FFA are fair and reasonable for both parties. By understanding the key aspects of a FFA and the relevant legal considerations, developers and investors can minimize risks and maximize the potential benefits of the agreement.