A Closer Look at the Financial Performance Bond (GFA)
1. Definition
The Financial Completion Guarantee (GFA) is an insurance policy taken out by real estate developers when the properties in the project are sold on a off-plan (for new properties) or through VIR (for existing properties to be renovated).
In fact, in a VEFA (Sale of a Property Before Completion) or a VIR (Sale of a Property to Be Renovated), the buyer purchases a property whose construction or renovation has not yet been completed. They pay for the property as the work progresses, which means that the developer will call for funds as the work progresses to finance the next phase.
In this type of transaction, there is a risk that the transaction may not be completed. The buyer would then find themselves the owner of a property that does not exist or is unfinished.
To address this issue, the GFA comes into play. It may be provided by a bank or an insurance company and covers the financing needed to complete the project in the event of the developer’s default. It is mandatory for real estate development projects and is the responsibility of the developer. The GFA is an extrinsic guarantee that can take two forms depending on the progress of the construction project.
2. The Two Forms of Extrinsic Guarantee
The two forms of extrinsic guarantee are the GFA and the Financial Repayment Guarantee. The latter takes the form of a surety bond issued by the developer to the buyer and guarantees the repayment of funds already paid if the developer is unable to complete the work. It is taken out at the same time as the GFA.
These two guarantees are interchangeable. The Refund Guarantee will be invoked more often in the event of an amicable or judicial termination of the sale due to failure to complete the transaction, while the GFA will be invoked in the event of significant progress on the construction site.
3. The Consolidation Account
To ensure the operation runs smoothly, the GFA will also monitor and oversee the project’s progress.
To this end, at the start of construction, a central account is set up with joint signing authority between the insurer/GFA bank and the developer. This is the account that will receive down payments from buyers and be used to finance the construction work. Depending on the type of lender, it may be possible to obtain a third signatory to also oversee repayments. This provides an attractive safeguard for the lender, as it then allows the lender to monitor cash flows as well.
What does that mean?
In other words, all project funding streams (bank loans, crowdfunding, or fundraising campaigns) related to commercialization are held in an external account. All requests for payment and disbursement of funds must be justified by the operator—through an invoice or certificate of completion—at each stage of the project, in accordance with the schedule set forth in the reservation agreement, which typically proceeds as follows:
Before the funds can be released, signatures from the GFA representative, the funder, and the operator are required.
The consolidation account therefore allows you to:
- Monitoring the progress of the work;
- Ongoing monitoring of the use of cash flows related to the transaction.
GFA is a guarantee for buyers who commit to purchasing a new or renovation property. In the event of the developer’s default, buyers may either be reimbursed for the down payments they made—if the default occurs during the program’s initial phase—or the insurer will take over the completion of the project to deliver the finished property to the buyer.