THIRD PARTY GUARANTEE MECHANISM AS AN INNOVATIVE SOLUTION FOR REAL ESTATE FINANCING AND DEVELOPMENT

This is a mechanism which can be utilized by an investor who is desirous of taking an investment position on a property or properties under construction.

The investor must have funds in a fixed deposit account which can be used to secure payment for the property or properties on an agreed date when construction must have been completed.

CASE STUDY

XYZ is an estate development company that has commenced the development of an estate of 200 detached duplexes in the Lekki area of Lagos. The houses are being offered to the public at the open market price of N30m each. The developer has offered 5units of the houses currently at foundation level to Mr. X at a discounted purchase price of N28m (twenty eight million) Naira for each bringing the total purchase price to N140m (one hundred and forty million) Naira.

Mr. X has the sum of N120m in a fixed deposit account in the same bank where the developer maintains its project account. Both parties have agreed that the delivery period of the houses shall be 14months upon payment of a commitment fee of N20m by Mr. X.

SOLUTION

Mr. X on the strength of his fixed deposit account should issue an irrevocable payment instruction to his bank to take a lien on his fixed deposit upon its maturity and use the principal sum of N120m to pay the developer for the 5 units of duplexes upon their completion and delivery.  On the strength of the irrevocable payment instruction, the developer can source materials on credit from suppliers, it could borrow from the same bank or better still use its  own funds to complete construction since the payment have been guaranteed. On the strength of the contract of sale and other relevant legal documents that would be executed by the parties, Mr. X may choose to offer the properties for sale at a premium to third parties while they are still under construction.

If he succeeds in selling the properties to 3rd parties at N30m each and receives payment before the date of payment agreed by him and XYZ, the development company, it means that he would be earning N2m on each house with only a marginal investment of N20m.

In addition to the profit from the real estate investment, he would also earn interest on his fixed deposit of N120m.

Chijioke Orji
Legal Practitioner and Notary Public

Hits: 176