Structuring a development project through an SPV

Many developers in Kenya start a project inside an existing company, alongside other land, other projects and other debts. That works until a bank or investor is asked to fund it. At that point, most will ask for the project to sit in its own company, a special purpose vehicle, with its own assets, contracts, bank accounts and books.

This brief explains why, and what a well-structured SPV looks like to a lender or investor.

Why lenders and investors want a ring-fence

An SPV separates one project from everything else the developer owns. Its assets, liabilities and cash flows are its own. That gives a lender three things it values: a clear view of the project's risks, security over the whole project in one place, and confidence that problems elsewhere in the group will not reach the project's cash.

Investors benefit in similar ways. They can take shares in one project without buying into the developer's wider business, and the SPV gives everyone a clean route to exit, through a sale of the shares or of the completed asset.

Ring-fencing limits what a lender can claim from the developer, so lenders usually ask for some sponsor support during construction. That might be a commitment to fund cost overruns or a completion guarantee.

Setting up the project company

Most SPVs in Kenya are private companies limited by shares, incorporated under the Companies Act, 2015. The articles of association should reflect the deal between the shareholders, and the company should hold everything the project depends on:

• Title to the land, or a lease long enough to satisfy the lender. Moving land into the SPV involves transfer costs, consents and stamp duty, so plan it early.
• Approvals in the SPV's name, such as county development permission, an environmental impact assessment licence from NEMA where the project needs one, and registration of the project with the National Construction Authority.
• The construction contract, consultants' appointments, sale or lease agreements and insurance policies.
• Its own bank accounts, KRA PIN and tax registrations.

The shareholders' agreement

Where the SPV has more than one owner, the shareholders' agreement carries much of the deal. Lenders read it to see who controls the project and who funds it if costs rise. A good agreement records what each party contributes, whether land, cash or expertise, and whether money goes in as share capital or as shareholder loans. It sets the process for further funding calls and what happens to a shareholder who does not pay. It lists the reserved matters that need everyone's consent, such as taking on new debt or changing the business plan.

It should also deal with deadlock, restrictions on selling shares before completion, and how the parties exit. Where the developer's own construction or management company will work for the SPV, the agreement should set out how those related-party contracts are approved and priced.

Security over project assets

A lender to an SPV will usually take security over everything the project owns. In Kenya, that typically means a charge over the land registered at the land registry, and a debenture or other charge over the company's assets registered with the Registrar of Companies within the period the Companies Act, 2015 allows. Security over movable assets, receivables and bank accounts can be registered at the Collateral Registry under the Movable Property Security Rights Act, 2017.

Lenders also commonly take a charge over the shares in the SPV, an assignment of key contracts and insurance proceeds, and a direct agreement with the main contractor that lets the lender step in if the developer defaults. Stamp duty and registration costs apply to several of these documents, so budget for them from the start.

Cash-flow waterfall and reserve accounts

Once the project earns money, from sales or rent, the lender will want to control the order in which it is spent. That order is the cash-flow waterfall. Income goes into a collection account, and money flows down to each level only when the one above it is fully paid. A typical order looks like this:

• Taxes and the project's operating costs.
• Lender fees and interest.
• Scheduled loan repayments.
• Top-ups to reserve accounts, such as a debt service reserve that holds enough to cover upcoming repayments.
• Repayment of shareholder loans.
• Dividends to shareholders, often only once the project passes agreed financial tests.

Reserve accounts give the lender a buffer if sales slow or a tenant leaves. Where you sell units off-plan, lenders will also want to see how buyers' deposits are held and when they can be used. Build the waterfall into your financial model early, so you can see what the structure means for your own cash.

Governance and tax advice to take

An SPV is a real company, and lenders expect it to behave like one. Hold proper board meetings, keep minutes, keep the SPV's money separate from the group's, and approve related-party contracts openly. Expect to send lenders regular reports on construction progress, cost to complete and covenant compliance, and to produce audited accounts.

Take tax advice before you incorporate, because the structure is hard to change later. Cover how land moves into the SPV, the VAT treatment of sales or rent, limits on deducting interest on shareholder and related-party loans, withholding tax on interest and dividends paid out, and the tax consequences of exiting through a share sale or an asset sale. Your advocates should draft and review the legal documents.

How we help

Epiidosis Africa helps developers get finance-ready at project level. Our financing and transaction advisory practice structures the SPV and funding plan with your legal and tax advisers, builds the project financial model with its waterfall and reserves, prepares the financing pack and reviews term sheets. We then introduce the project to independent licensed banks and financiers. Our insurance and risk consulting practice reviews the construction and operational cover lenders will ask for, and our research practice can prepare the market evidence behind your sales or rental assumptions. Our Project readiness programme brings this together.

We do not lend or invest, and we can't promise approval. The decision rests with the bank or financier.