Over the last few years, forward funding deals have become an increasingly popular structure within real estate development. For investors looking to balance the risk and rewards of a project with a developer, the structure can bridge the gap in liability expectations. By taking advantage of Warranty and Indemnity (W&I) Insurance, investors can further de-risk these transactions.
What is forward funding?
In essence, a forward funding arrangement involves an investor committing to purchase a property (or a special purchase vehicle that holds property) from a developer before the practical completion of the asset. Unlike traditional acquisitions, the investor provides the capital required for the development in stages, typically linked to construction milestones, thereby reducing the developer’s financial burden and exposure. In return, the investor secures the asset at a pre-agreed discounted price and stands to benefit from the capital appreciation of the asset upon completion.
The growth of forward funding transactions has been driven by the desire for stable, long-term income streams. Developers have sought access to funding without relying solely on traditional debt financing, particularly given recent economic headwinds and fluctuating interest rates. These deals are particularly attractive in sectors with strong rental demand, such as logistics and residential build-to-rent. As the real estate market continues to recover, and with the increased demand for housing across Europe, forward funding structures are anticipated to play an even more prominent role.
How are forward funding deals structured?
Under a corporate forward funding deal, the target company is often a newly incorporated vehicle with no trading activity and no assets. The target property is also usually owned by the seller rather than by the target at exchange.
To afford protection to the buyer, and ultimately the target company, the forward purchase agreement (FPA) will facilitate the delivery of collateral warranties in favour of the buyer and the target. As completion of the FPA is linked to practical completion of the asset, the gap between exchange and completion of an FPA is therefore longer than a traditional share purchase deal, typically ranging from one to three years. The FPA will also include various covenants given by the seller relating to the target’s operations during the period between exchange and completion.
Completion of the FPA is usually subject to the seller/developer satisfying several conditions including:
Providing evidence that all licences, consents and approvals for the occupation and use of the property have been obtained;
Receiving collateral warranties;
The transfer of the property to the target; and
Practical completion of the asset.
How W&I insurance responds in forward funding deals
As forward funding deals inherently involve property that hasn’t yet reached practical completion, it is unlikely that buyers will be able to conduct more than high-level due diligence. Therefore, the warranties given under the FPA at exchange will be limited to the seller warranting the particulars of the target company and property, and that the seller is the sole legal and beneficial owner of the property. Despite this, certain W&I insurers are willing to cover more than title and capacity warranties as at exchange, provided the relevant matters are backed by the initial due diligence. For instance, insolvency, litigation and contract warranties may be covered, subject to the findings from any legal and financial due diligence.
In advance of completion of the FPA, the investor will be expected to deliver supplemental due diligence that covers all matters that have occurred since exchange, and which expands the scope of the due diligence that was conducted at exchange. Subject to underwriting, the full warranty package catered for in the FPA should then be insured under the policy. The scope of this supplemental due diligence package should be agreed in advance and included in an appendix to the policy.
W&I in detail: forward funding vs. traditional sale and purchase agreements
Disclosure | The disclosure process is expected to proceed as it would under a traditional sale and purchase agreement, with a disclosure letter provided at exchange and again at completion. The insured will also be required to provide an executed no-claims declaration at exchange and again at completion in the usual way. |
Rates | The rate-on-line (premium as a % of the cover limit obtained) for forward funding deals is the same as traditional W&I deals; currently between 0.50–0.60% of the desired cover limit. |
Premium | On a traditional W&I-backed deal with a split exchange and completion, the payment of the premium is conditional on completion of the SPA. By comparison, due to the lengthy interim periods on forward funding transactions, insurers will typically require 25% of the premium to be paid at exchange, and the balance of the premium due from – and conditional on – completion. |
Underwriting Fee | As the structure of forward funding deals requires a secondary underwriting process in advance of completion, underwriting fees are slightly higher than for traditional deals (~£20–25k), typically with half payable from exchange and the balance due following completion. |
Enhancing your cover
As forward funding structures continue to gain traction in the real estate sector, the transactional risk insurance market has evolved in step. Insurers are increasingly willing to provide tailored coverage that reflects the unique risks and timelines of these deals, offering investors greater certainty and protection throughout the project lifecycle.
Available W&I coverage enhancements include:
An indemnity measure of damages as the basis for calculating loss under the policy. This is preferable to the standard UK contractual basis, which calculates loss based on the diminution in value of the target’s shares. The indemnity measure of damages basis provides a “£ for £” recovery regime that avoids the time consuming – and often contested – process of determining the loss amount, while maximising the insured’s potential claim amount.
Removal of general or individual seller knowledge qualifiers. This includes language such as “so far as the seller is aware”.
Disapplication of the data room and/or due diligence reports from the disclosure exclusion.
Due to the length gap and the structure of forward funding deals, new breach/interim breach cover is not available.
For more information, please reach out to a member of our team.
