Understanding GST on real estate
Every once in a while we hear news of old buildings collapsing in Mumbai. Buildings on the verge of collapse are a harsh reality for thousands of housing societies across Mumbai. Every building has a shelf-life, after which it becomes unsafe and difficult to maintain. The limited availability of land parcels in metropolitan cities has forged a way to redevelopment projects. Cities like Mumbai, Delhi and Bengaluru are amongst those cities that have undertaken redevelopment projects on a planned level.
So, if you are a buyer or an investor, looking to invest in a redeveloped housing project, it is requisite to know about redevelopment and what to look for in the same from a buyers or investors point of view.
What is redevelopment?
Housing redevelopment is the process of reconstruction of a residential premise by the demolition of the existing structure and construction of a new one as per rules and regulations from the municipal corporation of that particular city.
Redevelopment of any residential or commercial structure is a profitable concept which promises a win-win situation for both the developers and property owners. Developers as an incentive offer additional area, money, and the promise of a new flat with better amenities to the owners of older buildings.
Why is it needed?
The repair work of a building which is already 25 years old will only increase the building’s life by 3 to 4 years. Structural repair is not economically feasible to take care of seepage, weak walls and foundations, leaking water pipes, etc. Due to redevelopment, the members get a new building, more space and monetary benefits without spending any money of their own.
On the other hand, developers are always on the lookout for properties with unused development rights where they can build a new and higher structure where the additional storeys can fetch huge profits.
Redevelopment of old buildings or a complex of old buildings across the state can now be undertaken with consent from 51% of the owners which earlier required the consent of all the owners.
When is a property suitable for redevelopment?
Any residential or commercial building which is older than 25 years is eligible to undergo redevelopment once an architect declares it ram-shackled.
It is advisable for the society members to appoint a lawyer before signing any contract with the builder. In order to avoid malpractices that take place, every society going under redevelopment should select a builder through the tendering process.
While selecting a builder the society should prepare a comparative chart and after checking the merit, reputation, technical capability, experience, financial status, quality of construction and successful completion of projects. The members should vacate only after the developer has secured essential legal approvals and permits for redevelopment as well as when the agreement has been registered.
Transparency in the Contract:
The contract should clearly mention the commitments as promised by the builder with the consent of society members and should also discuss the penalty or consequences of any contract breach by either of the parties. Once the agreement is accepted in terms of area and corpus fund, it cannot be revised. So a clear and transparent agreement is what a buyer or an investor should look for. The society must not suffer losses if the builder abandons the project. The agreement must be inclusive to ensure that the members do not suffer any financial losses in such a case.
The agreement should mention the completion time of the project, the size of the new houses, the mode and nature of monetary compensation. The developer is responsible for giving a security deposit to the society members. The amount must be equal to the entire redevelopment cost. The developer also has to offer a monthly remuneration in advance with the brokerage and transportation charges that the tenant has to go through while securing an alternate abode.
The housing society should insist on a bank guarantee, which would take care of monetary compensation to ensure the project is not delayed or stopped halfway. The developer is responsible for giving a bank guarantee of at least 20% of the project cost.
Transfer of development rights (TDR):
Members of the society need to ensure that the developer purchases additional TDR and loads it on the society. If the TDR rules tend to change, the builder might refrain from providing extra flat area as promised so it is important for the developer to confirm those rights before vacating. The society should make sure that the TDR, redeveloped building, other amenities and future increase in FSI remain in the name of the society. Many times the builder includes a clause which makes the development agreement a ‘Transfer of Property’ rather than a ‘Transfer of Development Rights’
A society planning to undertake redevelopment must possess registration certificate, an original building plan, a lease deed/sale deed, an agreement and a title certificate. Property card and a NA (non-agricultural) order are additional requirements for the process. The society's name must appear in the property card maintained by the Survey Office else the society would not be eligible to go for redevelopment as Municipal Corporation will not permit demolition of existing structure and reconstruction.
When an old building goes in for an overhaul; homeowners as well as the developers, rejoice. Redevelopment is embraced in the time of shiny high-rises and massive towers. However, living with fear stops us from taking risks. The members of the society must go in for redevelopment with eyes wide open and make sure that they are not taken for a ride.