Trust Agreements have been used in the Colombian market for the execution of real estate projects, for over two decades. They have proved to be an effective mechanism for builders and administrators, in gathering the resources required for a real state project. As a result, Trust Agreements have become the main option for the execution of these projects without financing from banks or other financial institutions in early stages of the developments.
Through this structure, the promoter, with the help of a professional trustee, set up an independent estate that offers customers the possibility of investing directly in a real estate project, under the supervision of a regulated agent that guarantees the proper spending of the invested funds. Under the Colombian Legal Framework, trust agreements require the participation of a third party, which must be a financial institution. This financial institution is supervised by the Colombian Financial Superintendence and is obligated to comply with a series of requirements for incorporation and operation. The investors then gain the right to benefit from the development, either by receiving a share of the profits generated by the asset, or a specific portion of the asset itself.
The possibility of sharing profits from the operation of the asset while maintaining the independent estate after the construction process has finished, has made the Trust Agreement the preferred mechanism for the development of businesses based on real estate assets; such as hotels, shopping centers and spas.
Source of problems
Although successful, the trust agreement has not been without its problems. The trust companies that have been at the forefront of the implementation of this mechanism have, at times, allowed developers to offer a specific revenue for projects, without enough transparency regarding the risks of said projects. In other cases, trust companies have not been clear about the extent of their involvement in the project, letting customers believe that they had a greater level of control than what was contractually stipulated. Finally, in other cases, the trust companies have terminated the trust agreements during an ongoing project, transferring all responsibilities to the developers, leaving the final customers unprotected and permitting the loss of invested resources, without establishing clear liabilities.
An important modification to protect financial customers
In order to resolve some of these issues, on June 30 of 2017 an additional regulation for this structure was introduced through the External Memorandum (Circular Externa) 029 de 2014. Among the many changes implemented through this regulation, it is worth highlighting:
- It divided trust agreements for construction projects into 3 stages (Pre-sales, construction, and administration).
- It included specific information obligations on the trust company, mandating that the company explains to customers the possible positive or negative results of investing in every project.
- It introduced an additional step in the conclusion of trust agreements for construction projects offered to the public. Since these projects are offered en masse to customers, without any space for negotiation, they must be approved by the Colombian Superintendence of Finance before any public offer is made. This provides an additional control, which should give a greater level of security to customers.
Although considered by many as excessive and bureaucratic, the regulation does address key issues that have endangered the transparency of the real estate market in Colombia in recent years. The mass offering of investment opportunities might have become a way to circumvent regulations regarding IPO’s and other closely regulated and supervised financial operations. This additional oversight helps guarantee the quality of the projects being offered to the public and allows for increased investment opportunities in the Colombian real estate market.