Financing of construction

Construction of immovable property requires significant volumes of financing. Most builders planning construction of a particular property object should plan in advance potential sources of financial support.

Currently in Ukraine financing of construction of non-residential (or commercial) and residential properties is performed according to different structures.

Whereas construction of commercial property may be financed without difficulties from own funds of customer or commercial loans, construction of residential property through third party financing is permitted only through special Construction Financing Funds and Real Estate Operations Funds, institutes of joint investment, non-state pension funds and by way of issuance of corporate bonds.



Having regard to applicable restrictions, builders and investors of residential construction have developed and adopted as most attractive the following principal mechanisms for attracting funds for construction:

• corporate bonds;

• institutes of joint investment;

• construction financing funds and real estate operations funds. 2.5.1 Corporate bonds

In recent years, issuance of corporate bonds became a popular tool for securing financial resources in construction of immovable property.

According to the Law on securities, a bond is a security evidencing contribution by its holder of own funds, which establishes a debt relationship between the bond holder and the issuer, and it evidences the obligation of the issuer to return to the bond holder its nominal value within the time period provided by terms of bond placement and to pay specified income to bond holder, unless otherwise provided by terms of bond placement.

The following types of bonds are issued by the builder:

• purpose bonds - bonds that permit payment in the form of goods and/or services in accordance with requirements established by terms of placement of such bonds (in construction process, the purpose bonds are represented by bonds for square meters of premises and directly for premises);

• discount bonds - bonds that are placed at a price below their nominal value. The difference between the purchase price and nominal value of the bond is paid to the bond holder after maturity and represents bond income (discount) (in construction, such bonds do not refer to specific premises of construction object);

• percentage bonds - bonds providing for payment of income expressed as percentage of nominal value (such bonds may be issued in the first place by builders having relatively high level of standing and confidence with investors).

The placement of bonds may be:

• open (public) - placement on basis of announcement in printed media sources or other


'tUtUy form that are offered to an undetermined number of investors;

• closed (private) - placement of bonds through direct offer to a determined number of investors.

The general structure of operations of the builder with the bonds may be summarized as follows:

• issuance of bonds by the builder;

• organization of placement (primary sale) of the bonds:

- by means of conclusion of securities purchase-sale agreement referring to specific premises;

- by means of conclusion of agreement of investment in construction by means of purchase-sale of bonds;

- by means of mixed agreement of purchase-sale of securities that should contain elements of the securities purchase-sale agreement and preliminary agreement of exchange of acquired securities for constructed property objects.

• transfer of attracted funds to the builder for purposes of financing construction of the object;

• receipt of constructed property according to bonds (redemption of bonds):

- purchase-sale of property object — payment in the form of bonds;

- exchange of the property object for the set of bonds.

• cancellation of the bond issue.

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First Time Home Buyers Guide

First Time Home Buyers Guide

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