SHOULD YOU BUY PROJECT LAND THROUGH A CAPITAL CONTRIBUTION AGREEMENT? A LEGAL ANALYSIS OF THE BENEFITS AND RISKS

What Is a Capital Contribution Agreement for Purchasing Land in a Real Estate Project?

A capital contribution agreement is an agreement between parties to contribute capital for the purpose of financing an investment or developing a project.

In the real estate sector, many developers previously used capital contribution agreements to raise funds from customers during the early stages of project development.

Under such agreements, the capital contributor typically:

• Contributes funds according to an agreed payment schedule.
• Receives priority in purchasing or receiving the property upon project completion.
• Or shares in the project's profits as agreed by the parties.

It is important to note that a capital contribution agreement is not the same as a sale and purchase agreement for land-use rights or residential property. Entering into such an agreement does not automatically make the contributor the lawful owner of the real estate.

Why Have Many Projects Used Capital Contribution Agreements?

This financing model was widely adopted for several reasons:

• Developers needed to raise capital to finance project development.
• The project had not yet met the legal requirements for executing official sale and purchase agreements.
• Investors wanted to acquire properties at lower prices during the early development stage.
• Capital contribution agreements were generally quicker to execute than formal property sale transactions.

However, because these agreements are often signed before the project has completed its legal procedures, they can expose investors to significant legal risks.

Should You Buy Project Land Through a Capital Contribution Agreement?

To determine whether purchasing project land through a capital contribution agreement is a wise decision, it is important to carefully weigh both the potential benefits and the associated risks.

Potential Advantages

Lower Purchase Price

Buying land during the project's early fundraising stage generally offers the lowest entry price. Once the infrastructure is completed and the project becomes eligible for formal sale contracts, land values often increase by 20% to 50%.

Greater Profit Potential

This model may appeal to investors with available capital who are willing to accept higher risks in exchange for potentially higher returns by investing before the market fully recognizes the project's value.

Major Risks of Purchasing Land Under a Capital Contribution Agreement

Despite the potential for attractive returns, investors should be aware of several significant legal and financial risks.

Risk of an Indefinitely Delayed Project

If the developer lacks sufficient financial or operational capacity, the project may be delayed indefinitely. As a result, legal procedures such as project transfer approvals or land subdivision may never be completed, leaving investors' capital tied up for years.

Legal Risk: The Agreement May Be Declared Invalid

If a dispute arises and the matter is brought before a court, a capital contribution agreement that effectively functions as a sale of future property before legal conditions have been satisfied may be declared invalid.

In such cases, the developer may only be required to refund the original amount contributed, while the investor bears substantial losses due to inflation, opportunity costs, and increases in property prices.

Misuse of Contributed Funds

The developer may divert contributed funds to finance other projects instead of using them to develop the project in which the investor has contributed capital, increasing the likelihood of construction delays or project suspension.

Limited Liquidity

Transferring a capital contribution interest is generally much more complicated than transferring ownership in a completed real estate project. Because the legal status of the investment remains uncertain, resale opportunities are limited and the investment tends to have poor liquidity.

Comparison Table: Capital Contribution Agreement vs. Sales and Purchase Agreement