Nowadays Belarus is experiencing the building boom. In fact, Belarus lacks satisfactory offices, shopping centers, hotels, logistical centers and other commercial real estate.
Now a number of major and medium projects are carried out in Minsk and regional centers. Nevertheless, supervision over the progress of some projects implementation shows that local investors just have no means to realize them. Some projects cannot start up because there are no investors in Belarus who can put up hundred millions dollars or euro in such projects.
Foreign investors could improve this situation, but they do not hurry up to invest in Belarusian economy though they are interested in it.
What worries investors? First of all, it is serious risks connected with investment in Belarusian real estate. There are hardly many investors who are ready to carry out projects in Belarus from the ground up. It is much easier and more effective to invest in projects which are already started by someone and have "marketable appearance".
In that case the risks connected with investment also increase. That is why companies “Konkordia Invest Centre Ltd.”, “Stepanovski, Papakul and partners Ltd.” and “VivaInvest” have created a strategic alliance. Its task is integral counseling of investors on potential realization of various investment projects in Belarus.
In this publication I would like to mention briefly potential ways to minimize the risks of investments in already started projects connected with real estate.
The legislation "*" defines an investor as a person (legal units and individuals; foreign organizations that are not legal units; state in the name of competent authority and its administrative-territorial entities in the name of authorized bodies), who carries out investment activity, in particular by purchasing shares in authorized capital of a legal unit, including purchase of real estate units.
There are several potential ways of investment in already started projects. The first way is to acquire a legal entity (shares, participatory interests or an enterprise as a property complex) which is engaged in realization of this project (further - the builder); the second way is to realize a project together with the builder, having concluded the appropriate contract.
The first alternative is purchase of a legal entity - the builder. The purchase of the builder will allow an investor to control risks connected with use of investments, to influence decisions made by the builder on various matters. There are several alternatives of the purchase - purchase of shares or participatory interests, or purchase of an enterprise as a property complex. In the case when a builder realizes several projects, and is going "to sell" only one of them, it is necessary to make this project a separate legal entity, an economic society, and to sell shares of thas legal entity.
In any case, the investor should carry out financial and legal audit of the acquired legal person (legal due diligence) with a view of minimization of various risks.
The second way not only reduces the terms of "launching" the project, but also substantially raises investor’s risks connected with realization of the project.
The legislation "**" points out that the investor who provides financial backing of a construction can realize the investment project on his own or involve the customer, the builder for its realization.
Relationships between the investor, the customer, the builder are settled by legislation and contract. When the investor enters into already started project there is a person who combines functions of both the investor and the builder.
What type of contract should be concluded by the parties to provide the observance of their interests?
As a rule, the parties conclude the contract of simple company (about joint activity) according to which the investor puts up money into construction, and later on he will probably receive a part of the created real estate unit, and the builder will exercise functions of the builder (customer), and after realization of the project he will also receive a part of the real estate unit.
We believe that in this situation the investor takes serious risks since he has to rely considerably on financial solvency and decency of the builder. It follows from the functions carried out by the builder (customer) during the construction. According to the normative documents " *** " which settle the activity of the builder, the functions of the builder during the realization of investment programs, in particular, are the following:
· obtaining of a document confirming the right to use the ground area with specifications on conditions and terms of its use, about tap of this site in nature with registration of appropriate documents;
· obtaining of permitting documentation in corresponding local executive and administrative body on design and exploration work and construction of object;
· organizing and carrying out the accounting, operative and statistical account, drawing up and due representation of the reports connected with the activity of the customer during the construction of object;
· transfer of financial resources to the contractor allocated for the construction of the object in the way settled by legislation.
Even listed functions of the builder prove that he (not the investor) is the main participant of the investment project.
Thus, investors who finance creation of the real estate unit should understand the importance of guarantees of their investments preservation. In this situation the investor may be advised to "transfer" rights and obligations of the builder on himself. In that case, the rights to the ground area can be transferred to investor, and that can be one of guarantees of investments. Thus, it is necessary to remember, that the right to use the ground area can be entitled only to legal entities of Belarus, and the right of rent is entitled to foreign legal entities as well.
Unfortunately, the question on transfer of the rights to the ground area on the investor when the site is provided to the builder on auction or competition is not legislatively settled.
In practice, the authorized state body can make a decision to transfer rights to the ground area to investor if presented documents show that the builder and the investor have concluded the contract of simple company (joint activity) and the subject of this contract is creation of the given real estate unit, and the construction of the object is in progress or it is constructed at the expense of the investor.
The situation described above fits those cases when there is a strategic investor, whose share of investments into the project is very significant. In the situation when there are several investors, the volume of investments is significant, and all investors need guarantees, it is necessary to consider the question concerning the purchase of shares of the legal entity - the builder, and the subsequent joint management of the project through governing bodies of this legal entity.
"*" The investment code of Belarus, article 3, article5;
"**" The Law "About architectural, town-planning and building activity in Belarus ", article 55;
"*** "Instruction" About the builder, the customer in construction ", approved by the order of the Ministry of architecture and construction of Belarus from 22.06.1999 ¹174 redrafted by the decision of the Ministry of architecture and construction of Belarus from 31.12.2004 ¹30.
Alexander Stepanovski,
Director, Managing Partner
"Stepanovski, Papakul and partners Ltd."
