Development Agreements (cont'd...1)

Forward Funding Agreement

A Forward Funding Agreement is generally used when the developer has managed to 'pre-let' the site prior to the development taking place.  Under this type of agreement the developer sells the entire site to the purchaser prior to development taking place.  The sale and purchase of the site is completed when the agreement is entered into with the purchaser paying the value of the site at that date. 

The developer then carries out the development and the purchaser pays the costs up to a maximum commitment.  Any costs that go beyond the maximum commitment are usually borne by the developer.

When the development has been completed and let to tenants then the developer usually receives a profit payment.  This is usually the total rent roll which is capitalised at an agreed yield, minus the total development costs and any unexpired rent free periods.

This type of agreement aims to strike a balance between the risks and rewards of funding the development in that the developer carries less risk for the development costs but settles for less profit; whilst the purchaser takes on the risk of development costs but hopes to achieve a yield that is higher if he had waited until the development was built and fully let before buying.

Speculative Funding Agreement

This is the same as a Forward Funding Agreement save that the site is not 'pre-let' before the sale takes place.  Under this type of agreement the developer takes on more of a 'letting risk' in that the Developer will not be entitled to any 'additional profit payment' if he cannot attract tenants to let the units on the development prior to the development being completed.  Furthermore, the price the purchaser will be willing to pay will be less if the site is not 'pre-let'.