Development Agreements

So, you are the owner of a Greenfield or Brownfield site.  You have gained planning permission for the construction of a Trade Park, Retail Park or Office Block.  The plan is to construct the park or block, let the units to high class tenants and then 'cash in' by selling the development to a pension fund or institutional investor.   The only problem is how are you going to fund the development costs?   There are a number of ways in which this can be done:

Bank Finance Agreement

This type of agreement is used when a developer borrows money from a bank to secure funding for the development.  In return the bank will take a mortgage over the property.  This type of agreement may be used when the developer has pre-let the site and sold it under a Forward Purchase Agreement or if the Developer wishes to build the Development himself and delay selling it until all the units have been let thus maximising the return on sale.

Forward Purchase Agreement

Under this type of agreement contracts are exchanged for the sale of the site prior to the development being finished.  However, the purchaser does not advance any money to the developer during the construction stage.  In other words completion of the sale and purchase does not occur until the development has been finished. This means that the developer must stand the construction costs.

The price payable for the site can be agreed in advance.  However, if the Developer has managed to fully or partly pre-let the site during the construction period then the purchase price can be calculated by capitalising the total rent roll achieved less any unexpired rent free periods. 

The rationale behind using this type of agreement is two fold, namely; the contract can be used as security to secure bank funding for the development costs (see above) and  if the developer manages to 'pre-let' the units on the site prior to the development being finished then the developer will have negated any 'letting risk'.