In today's article, as a continuation of the series on PRS investments, we will present the topic of contracts for the implementation of PRS investments.
It's important to emphasize from the outset that implementing PRS investments breaks away from standard solutions, which focus on developers purchasing pre-built projects. This business model emphasizes synergy between the developer and the fund, as we discuss later in this article.
It's important to emphasize that the development of rental apartments is primarily dependent on institutional investors, whose presence can only positively impact the housing shortage in the rental market. It's worth noting that PRS investments create a myriad of transaction scenarios, making them an even more unique residential investment project. Therefore, it's important to emphasize that there is no perfect transaction scenario, as each is multidisciplinary and characterized by a high level of flexibility, tailored to the investor's needs. However, the common denominator of such investments is the pursuit of meeting the expectations of a specific group of potential tenants. The goal is to maximize tenant diversification, which is intended to attract diverse groups and break the current pattern of a predominantly ownership-based approach to real estate.
The coexistence of a developer with a fund is best exemplified by the forward-funding formula, which involves the fund guaranteeing all funds for the implementation of a residential investment, while the funds transferred by the fund ensure the developer can ensure the desired standard of finishing for both the units and the entire building. Joint transactions between the fund and the developer are generally compatible with the National Housing Program, which the Polish government introduced in 2016.
The developer's business relationship with the fund, and related forward-funding/forward-purchase transactions, begins at the land purchase stage. This is jointly implemented to ensure it best meets the expectations of the fund's clients and the fund's design standards. However, this does not exclude the developer from leveraging a land bank, often consistently built over years, as institutional investors greatly value developers' knowledge and experience in this area, as well as their intuition regarding the appropriate location for such an investment. Therefore, beyond the land purchase stage itself, such transactions also involve the purchase of premises or buildings by the fund at an early stage of development, securing construction financing by the developer, and strictly defined terms and deadlines imposed on the developer.
From the above, we can derive a general principle of close cooperation between the developer and the fund, culminating in the turnkey delivery of the investment, in accordance with the standard provided by the fund. It is important to note that this is an example of cooperation in which the developer's knowledge and experience, combined with the organizational capabilities and extensive capital availability of the institutional investor, translate directly into the creation of a product that provides a worthwhile alternative to the necessity of acquiring property ownership. It is also worth noting that the collaboration of such entities makes it much easier to implement environmentally friendly solutions within the investment that contribute to the intensive yet balanced development of the urban fabric. It is worth recalling that an exemplary PRS investment begins with the purchase of the property and then encompasses all other stages, even before the commencement of work, such as the conclusion of the design agreement, the agreement with the general contractor, and the project management agreement.
It may well turn out that the developer begins working with the fund only after obtaining a building permit. In such a case, the developer and the fund, after concluding an investment agreement, will jointly implement the investment, with payments to the fund being made in accordance with construction progress and the agreed-upon schedule. This allows the developer to finance the investment on an ongoing basis while also protecting the interests of the institutional investor as the capitalizing entity. Next, the developer must complete the turnkey finishing and furnishing of the units.
It should be remembered that the cooperation between the developer and the fund also includes joint marketing and the conclusion of lease agreements, which are important elements of the developer's investment agreement with a specific fund.
We emphasize that professional advisors will play a crucial role throughout the PRS investment process. Their role in the initial phase of cooperation between the fund and the developer is strategic, as this period determines the quality of the relationship between the parties to the transaction, and consequently, the quality of the investment. It is highly desirable to select advisors with experience in this sector, as it differs significantly from typical development projects.
In the next article, we will present the topic of lease agreements in PRS investments.
This article is for informational purposes only and does not constitute legal advice.
Legal status as of September 20, 2022.
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