Sunday, 29 March 2015

Redevelopment: Demand an exit clause plus 40% down-payment while selecting builder

13th March 2014: Owners of older flats in metros like Mumbai take note: redevelopers are exploiting you. Even before your society signs the redevelopment agreement, you lose control over your flat – the precious asset of your family that fetches one or two crore rupees in metros like Mumbai. Builders, with your office-bearers’ support, make it impossible for you to sell your flat for several years. (Sometimes, you can sell but at a severe loss; you will be forced to settle your family in a poorer neighbourhood or a smaller flat.)
Until they give vacant possession of their flat, flat-owners often get no money from the builder. This is because they don’t know their own rights! What flat-owners must remember is that financial control of their home is a separate asset, which can be used for mobilizing funds by mortgaging to any lender. When the society enters into the redevelopment process and selects a builder, the flat-owner loses the power to mortgage his flat to a lender. Usually, the builder does not compensate for this loss except possibly at the time of giving possession of the new larger flat. (Quite often, the extra area in the new flat barely compensates for this very substantial loss. In the net calculation, the builder gains and the flat-owner loses substantially.)

The builder starts cashing this invisible asset from day one! How?
1)    As soon as the builder gets selected by your society, he puts up a board in your building compound announcing a new project, and starts receiving booking-money from early-bird investors of from financiers.
2)    The builder may also get substantial payments from present residents of the building, including tenants, towards booking larger flats. Your society is a readymade market for the builder!
3)    He may also use the redevelopment agreement itself as an asset, and offer other builders the right to participate in the redevelopment by purchasing shares in his private limited company. He may earn a lot of money from other builders upfront against your asset, without laying a single brick.
4)    During the many years of the redevelopment process, the property prices rise by 50% or even more. So, the longer the delay in implementing the project, the higher is your builder’s profit margin. But your corpus fund, hardship allowance and rental allowances remains frozen at the earlier decided rates. Therefore, you suffer losses of several lakhs because of the builder’s delays, while the builder himself gains in tens or even hundreds of crores.
While enjoying all these benefits, the builder restricts your freedom to sell or mortgage your flat. And you are willingly giving it to him for free, against nothing more than a piece of paper called redevelopment agreement containing some rosy promises!
Rampant commercialism, absence of commonsense among the public, and high court judgments favouring builders and pro-redevelopment members – all have diminished flat-owners’ control over their own flats.
Mutual mistrust among cooperative society members and office-bearers, benefits crooked PMCs and builders. Society office-bearers usually use the redevelopment agreement for controlling society members, and not for controlling the builder and PMC. This means that if anything goes wrong with the redevelopment project, the flat-owner will be wasting so much energy and resources fighting against his own society’s office-bearers that he will have little resources left for fighting against the builder.
Also, the public believes that it can easily approach the judiciary to enforce the terms of the agreement against the builder if necessary. This is untrue. For various reasons, it is almost impossible for a society to go to court, and quite easy for the builder to do so.
Societies generally insist that the selected builder should pay the PMC. This makes the PMC one with the builder, and ties the hands of the society. By the time unpleasant truths about the builder and PMC become known, the society is almost literally married to the builder, and it is too late to come of this messy relationship!
This situation needs to be remedied. People need to become aware of the true commercial value of their asset, as well as the risks loaded on their heads by the builders.
Redevelopment always exposes flat-owners to huge risks, especially the risk of the project getting stalled midway after the original building has been demolished. The risks come from many directions, such as:
i)    Market uncertainties such as a steep fall in the property values, or steep rise in prices of cement, steel, TDR etc.
ii)    Regulatory uncertainties e.g. recent changes in Development Control Rules and Supreme Court judgment regarding compulsory open-spaces.
iii)    Builder’s financial mismanagement and losses in other projects, share market etc.
iv)    Death or illness of the builder, or dissolution of his partnership firm, or disputes among family members.
If one assign actuarial money-value to such risks, it should be at least 40% of the current market-value of the flat. This risk is NOT compensated by the mere promise of a larger flat or payment of 10% corpus fund. Nor is this risk mitigated by the so-called bank guarantee, which is roughly equal to the market value of one or two flats in a project of 60-80 flats.
In other words, people are giving builders a free ride to the bank, at their own risk and expense, and all in because of a promissory note in the form of development agreement!
REMEDY: Ask the builder to give each flat-holder 40% of the value of their flats as a down-payment at the time of selecting the builder, as a pre-condition for signing redevelopment agreement. This is over and above the extra floor space in the new flat to be constructed.
Another big unforeseeable risk for flat owners builders impose major changes in the terms and conditions AFTER THE BUILDING HAS BEEN DEMOLISHED. They make an excuse that the municipal corporation rules or Development Control rules necessitate such changes, which are to the disadvantage of the flat-owner. The poor flat owners have no option but to accept whatever the builder says. The flat owners come out poorer in the end; it would have been better to sell the flat before the redevelopment process started!
To reduce your exposure to this risk, it is necessary to specify that a further 30 percent advance payment will be paid to flat-owners (and not to the managing committee) at the time of giving vacant possession. The present practice of taking about 10% of the flat-value as Corpus Fund while vacating the flat is not adequate.
It is important that every society’s redevelopment agreement with the builder must contain a clause that looks like this: “It is agreed between the parties hereto that, if any of the Members of the Society wants to sell his premises, then in that event the Developers hereby guarantee to buy the premises being sold by the outgoing member at a minimum price of Rs 15,000 (estimated current market price plus 20% margin for inflation) per square feet on the existing Total carpet area, including balcony, of the premises occupied by the member who wants to sell the premises in his possession. This guarantee from the developer is unconditional, and may be availed by any member at any stage after signing this Agreement, until the handover of possession of the completed flat with Occupation Certificate. Further, the Developer shall have “First Right of Refusal” over every flat. I.e. The member must first offer the flat to the developer, and only if the developer refuses to purchase the flat at the price being quoted by the member (i.e. higher than Rs 15,000) may the member sell it to other parties.”
Such a clause is necessary because if a society member does not wish to continue with the risks of redevelopment, he must not be compelled to do so. In case a flat-owner chooses this option, the other payments made by the builder may be adjusted against this amount.
After the redevelopment is complete, when the builder hands over the keys to the new flat, 50% or more of the advance payments made by the builder can be returned to him. The other 50% can be retained by the flat-owner as compensation for having borne the various risks involved. This should be negotiated in the beginning.

At present, a redeveloper is always in a monopolistic position vis-à-vis your housing society and your flat. He determines the market value of your property and he controls it completely. (In fact, even before a builder has arrived on the scene, the society members find it difficult to sell their property if their society is considering redevelopment!) The above steps are suggested for society members to break this monopolistic hold over your family’s precious asset.
Don’t wait for others to speak on your behalf. Remember, this is a business dealing, and you are expected to think of your own welfare, and not the builder’s problems or even the society’s problems. Even if your society has signed redevelopment agreement, and even if you are at the point of handing over vacant possession to the builder, please fight tooth-and-nail to have these clauses included with retrospective effect!
Best of luck,
Krishnaraj Rao
98215 88114
OTHER ARTICLES for people who question and oppose faulty redevelopment:

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