Construction Finance Fund (“CFF”) in Ukraine

What is a Construction Financing Fund.

A Construction Financing Fund (CFF) is the funds that are transferred to the manager of the Construction Financing Fund for management, and which are used or will be used by the manager in the future under the terms of the Fund Rules and the CFF Participation Agreements.

Buying an apartment in a new building by investing funds through the Construction Financing Fund (hereinafter - CFF) is one of the most popular investment schemes in Ukraine.

How reliable is this investment scheme for the investor? How are the provisions of the law implemented in practice? Does this investment scheme provide a 100% guarantee of commissioning the complex and obtaining ownership rights by the investor when purchasing real estate?

All investors who plan to purchase real estate through the CFF ask these questions. In this article, we will cover the legal aspects in the legislative and practical plane of this investment scheme.

Legislation that regulates the attraction of funds for construction through the FFS: The Law of Ukraine "On financial and credit mechanisms and property management in housing construction and real estate transactions" (as amended) dated 19.06.2003 No. 978-IV, identifier 978-15 ( link to the law).

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Which parties participate in the investment scheme through the Construction Financing Fund?

Owner of the land plot on which construction is underway - an individual or legal entity that has entered into an agreement with the developer;

Developer (construction customer), a legal entity authorized to perform the functions of a developer, who has entered into an agreement with the owner of the land plot (if it is owned by third parties!) and the manager;

Principal (investor, real estate buyer) - an individual or legal entity investing funds in order to obtain ownership of real estate.

Manager of the Construction Financing Fund - a financial company or bank that acts on its own behalf in the interests of the principal and manages funds for the purpose of constructing a residential complex).

Types of Construction Financing Fund:

Construction Financing Fund Type "A".

Construction Financing Fund Type "B".

Types of Construction Financing Funds in practice:

For CFF type "A", the current price of a measurable unit of a construction project (e.g., sq. m), the properties of investment projects (characteristics of an apartment, room, storage room, parking space) and the construction project (residential complex), floor and comfort coefficients are determined by the developer. It is the developer who assumes the risk regarding the insufficiency of funds attracted for the construction of a residential complex and is obliged to put it into operation in a timely manner in accordance with the design documentation and perform all necessary work to comply with the technical characteristics of investment projects and the construction project, regardless of the amount of financing.

Unlike the FFS of type "A", in the financing fund of type "B" all these indicators are determined by the manager of the fund, subject to obtaining permission from the body that supervises and regulates the activities of the manager. In practice, the FFS of type "A" is used, since there are difficulties in the legislative and practical implementation of the FFS of type "B".

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How the Financing Fund is created construction?

By law, the Construction Financing Fund is created at the initiative of the manager. In practice, most often the name of the CFF corresponds to the name of the residential complex.

When investing in the CFF, you should pay attention to the developer and manager company. They should not be created by the same founder. In practice, developers create "their" management company, and if one of them goes bankrupt, putting the complex into operation and obtaining the desired property becomes impossible. Often, such a scheme is used for "fraudulent" schemes.

A more reliable manager of the Construction Financing Fund is considered to be a bank, because:

1. Considering the level of public confidence in the banking system, only large banks have a positive reputation to attract significant amounts of funds from both individuals and legal entities.
2. Creating a CFF on the basis of existing banks will make it possible to do without additional documentation.
3. Control over the activities of the managing banks is also carried out by the National Bank of Ukraine.
4. Control over the activities of the Developer, which is carried out by the managing bank, will protect investors' funds from misuse.
5. At the initial stage of construction, developers have the opportunity to receive financial support from the bank in the form of a loan.
6. While the money is in the bank, it is not subject to any taxes. And from this money, as needed, construction is financed.
7. There are reliable standards of financial stability that can protect funds in the event of a bank's bankruptcy.
8. The risk of new financial pyramids will be reduced if the FFS is created within already known, effectively operating and transparent structures.

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What is the investment scheme in the Construction Financing Fund?

The developer enters into an agreement with the manager for the construction of a real estate object - a residential complex (hereinafter - RC). At the same time, at the initiative of the manager, the CFF is created and an account is opened in the bank, where funds from investors are transferred to the fund. The manager cannot pay off his debts with the fund's funds, since they must be used exclusively for the construction of the residential complex. This is an advantage of this investment scheme. In turn, the Principals (investors (buyers) enter into agreements with the manager, on the basis of which the property rights to real estate (apartment, premises, storage room, parking space) are assigned to the investor. The manager has no right to dispose of the property after the conclusion of the agreement with the principal, to sell it to third parties. To confirm this, the principal maintains a register of investors, an extract from which can be requested after the conclusion of the agreement as a guarantee of the absence of double resales to third parties.
When concluding an agreement on participation in the FFS, the principal must familiarize himself with the FFS Rules, which are an integral part of this investment scheme.

The manager controls the progress of construction and the costs that are transferred to the developer's account. For this work, the manager collects a fee stipulated by the agreement between the manager and the developer.

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Advantages of investing through the Construction Financing Fund:

- this investment scheme is regulated in detail by law;

- since it is concluded on "white sheets", without notarization (which is not prohibited by law), the registration of the property right occurs immediately to the investor, there are no notary services, taxes, military tax, state duty, payments to the pension fund. The investment scheme through the FFS is good because after the completion of construction, the property right is immediately transferred to the investor. In this scheme, there is no need to pay 8.5% tax, military tax, state duty, payments to the pension fund.

- there is control over the fulfillment of the developer's obligations.

But despite the above, it is necessary to carefully check the documents and reputation of the developer and manager, documents for the land plot, permits for construction, since in practice, it is here that the most common violations of the law occur, which are detected by the National Bank of Ukraine, the State Commission on Securities and the Stock Market, the courts of Ukraine, which entails a delay, conservation or suspension of construction. To avoid this situation contact us for expertise of the investment agreement and the developer by a lawyer for new buildings.