Investment agreements for Spanish real estate projects: which provisions matter

The investment agreement for a Spanish real estate project is the document that determines what you can enforce. Not the presentation, not the project budget, and not the conversation in which the duration was explained. If a project deviates from the schedule, the agreement is the only document that will be looked at.

In practice, that document is the least read of everything an investor receives. This page goes through the twelve provisions that truly determine your position, with the question you should ask for each provision if it is missing or vaguely formulated. It is an explanation of what is standard, not legal advice regarding your own agreement.

Why the agreement carries more weight than the proposition

A proposition describes the intent. An agreement describes the obligation. As long as a project runs as budgeted, no one notices that difference. As soon as something deviates, it is the only thing that counts.

Furthermore, a Spanish project structure consists of two layers. The company's articles of association govern internal relations and decision-making. The investment agreement governs your specific position within that. Both documents must align with each other. How that first layer is structured is explained in the article on investing via a Spanish S.L..

An agreement that permits something the articles of association forbid leads to a discussion you do not want to have at the moment when money needs to be put on the table.

Block 1: who, what, and how much

The first four provisions establish the foundation. They seem self-evident, but in practice, they are not always so.

1. The parties

With which entity are you entering into the agreement? Is it the project company that owns the property, or a holding company above it? That distinction determines who you have a claim against and whether that claim is directly linked to the asset.

Check the mentioned company in the Registro Mercantil and compare the director with the person signing.

2. The asset

Which property is involved, including the registration number from the Registro de la Propiedad. A description such as "a villa in the Estepona area" is not an asset definition. Without a finca number, it is impossible to determine what your capital is tied to.

3. The amount and the timing of the deposit

What amount you are contributing, to which account, and according to what schedule. For renovation projects, funds are often deposited in tranches linked to construction phases. Specify which milestone releases which tranche and who determines that the milestone has been reached.

4. The form of your participation

Are you participating in the profits, providing a loan at a fixed rate, or is it a hybrid form? This is the provision that determines your ranking and whether you are a creditor or a co-owner. If you are participating through a company, be sure to read the article on real estate through your holding company.

Block 2: securities and ranking

The next three provisions determine what you are left with if the project does not yield what was budgeted.

5. The promised security

What security is being established, on which asset, and within what timeframe. A promise in an agreement is a commitment, not yet a security interest. Ask for proof of registration, not proof of the deed. How to verify this is explained in the article on mortgage security in Spain.

6. Ranking

Your position in the hierarchy and whether there is room for a subsequent registration ahead of you. A provision stipulating that no security with a higher rank will be established without your consent is at least as valuable as the security itself.

7. Additional financing

Whether the company is permitted to raise additional capital during the term, and if so, under what conditions. Without this provision, your relative position during the project could weaken without you having any say in the matter. If a structure operates exclusively with private capital and no bank financing, ensure this is also documented.

Block 3: term, exit, and decision-making

The final five provisions concern the progress of the project and who decides if things do not go as planned.

8. The term and extension

When the term ends, whether an extension is possible, how often, and for what maximum duration. An extension provision without a limit is an open-ended risk. What an extension does to your return is detailed in the article on exit scenarios for a Spanish renovation project.

9. The decision to sell

Who determines when and at what price a sale occurs. Establish a floor price below which your consent is required. In a renovation project, this is the decision where money is either made or lost.

10. The distribution key and the order of payout

How the result is calculated and in what order payouts are made. Which costs are deducted first, who gets their initial investment back first, and is the profit calculated before or after a management fee. Two agreements with the same 50/50 profit split can differ significantly on this point.

11. Reporting and inspection

What information you receive and when, and which documents you are entitled to inspect. Quarterly investor updates are standard in this segment. Additionally, ensure you have the right to inspect project records and obtain an up-to-date nota simple for the property.

12. Applicable law and disputes

Which law applies and which court or arbitration institute has jurisdiction. For a Spanish property and a Spanish company, Spanish law is the logical choice, even if you live in the Netherlands. Know in advance where you would have to conduct proceedings, as this determines the costs and duration of a conflict.

What readers most often miss

Four things are consistently overlooked when reviewing an agreement.

• The alignment between the agreement and the articles of association. Requesting both documents and comparing them side-by-side is an hour's work
• The order of distribution. The distribution key is read, but the waterfall sequence is not
• The management fee and cost allocation. A fee that is deducted before profit calculation reduces your return, not the initiator's
• The provision regarding additional financing, which is often missing and becomes particularly relevant in the event of delays

What an agreement cannot solve

A watertight agreement does not eliminate project risk. A renovation that ends up costing more or a market that grinds to a halt cannot be fixed by a clause. The agreement determines your position and your rights if things go wrong, not whether they go wrong.

Nor does it offer protection against a counterparty with no assets. An excellent agreement with a shell company results in an excellent claim that is worth nothing. Therefore, also look at what lies behind the signature: the entity's equity, the project-specific administration, and whether previous projects have been completed. How these elements affect the outcome is explained in the article on returns on Spanish real estate.

Frequently asked questions

These are the questions that come up most often once a draft agreement is on the table.

Must the agreement be notarized?

Not always. A notarial deed and registration in the register are mandatory for establishing a mortgage. For the investment agreement itself, a private document is possible, although notarization provides greater evidentiary value and a fixed date.

In what language should the agreement be?

With a Spanish company, the Spanish text is usually leading. A bilingual version is common. Specify which version prevails in the event of a difference in interpretation, as that provision is often forgotten.

Can I have the agreement amended?

In a project-based structure, there is usually room for adjustment on points such as the reporting cadence, the minimum price for sale, and the extension term. Standard texts are a starting point, not an end point.

What is a reasonable response time?

Take the time needed to have the document reviewed by your own advisor. A counterparty that demands a signature on short notice without a substantive reason is providing information that you should take into account.

How do I verify that the signatory is actually authorized?

Via the Registro Mercantil, where directors and their powers are publicly registered. If someone is signing based on a power of attorney, ask for that power of attorney and check its scope.

What if the security is not established within the agreed timeframe?

Then it depends on the provision that attaches a consequence to it. A deadline without a consequence is just an intention. A deadline with a right to repayment or suspension of further payments is an agreement.

Next steps

Review a draft agreement in this order. First the parties and the object, then the security and the ranking, then the order of distribution, then the decision-making regarding sales and extensions, and only then the return percentage. Anyone who starts with the percentage will no longer read the rest with the same attention.

Would you like to see how these provisions are worked out in a concrete project proposal, including the securities and reporting agreements? Schedule a personal appointment.

This article is general in nature and does not constitute legal or tax advice.