The reputation of the DDU (abbreviated name of the agreement) suffered in the 2010s from a number of high-profile scandals involving unreliable developers, but in 2019 the legislation was improved, and equity holders received guarantees of the safety of their funds.
Under the agreement for participation in shared construction, the developer undertakes to build a residential property, and the equity holders undertake to accept it and pay for it if the property is put into operation. Previously, the principle of direct joint financing by the equity holders of the developer was used, which led to a number of abuses on the part of the latter. In fact, in practice, developers often withdrew funds without completing the construction of the house. Now, equity holders place funds in a special escrow account in a bank, and they remain there until the facility is put into operation. The developer does not have access to this money; he builds the house with his own funds or with borrowed funds.
In essence, a financial intermediary appears between the developer and the equity holders, completely independent and impartial. Despite the bank’s participation in this scheme and the freezing of funds for some time, the agreement essentially remains an investment one, since the shareholders make contributions before the house is built, and the developer has a guarantee of receiving funds upon fulfillment of the terms of the agreement. And at this stage, there are risks for both the shareholders and the developer, the DDU remains a rather risky transaction.
The advantages are that housing under the DDU can be bought cheaper, the transaction is registered, therefore it is safe, construction and compliance with all requirements are monitored, and a penalty is provided for failure to meet deadlines. The disadvantages for the shareholders are that they will still have to wait for the apartment, while the developer is allowed to shift deadlines and change the design documentation. As a result, investments may depreciate. As for the developer’s risks, construction, like any business, involves risk, especially when implementing large and long-term projects. There is always a possibility of disruption of deliveries, discovery of hidden circumstances, deficiencies, etc., which may entail financial and other liability.