Thursday, 5 November 2015

How PMCs undervalue redevelopment projects & generate black money

Figures manipulated to show Rs 110 cr. profits as Rs 12 cr. only

5th November, 2015, Mumbai: Builders usually underplay the monetary value of their redevelopment projects so that they can offer tiny amounts as bank guarantees, and so that they can evade income-tax and earn pots of money in cash. Mulund’s Shree Gurukrupa Nagar Cooperative Housing Society seems to be a live example. Project Management Consultant Atul Mehta wrote in his project report ( ) that the builders, Concrete Siresukan Realty LLP, would earn a profit of only Rs 12.14 crore after building over one lakh square feet!

If the PMC’s report is to be believed, the three LLP partners -- namely Anuj Desai, Nilesh Dalal and Bharat Talesara -- would together earn the market price of 8 to 12 flats after slogging for a couple of years to get all the necessary building permissions, and then another 2-3 years constructing over 160 flats totaling one lakh square feet, and then handing over new flats to 72 original society members, and finally marketing the remaining 80 or 90 flats to recover the money that they invested. Only after the last 8 to 12 flats are sold, the builders will finally make their profits! Poor fellows.

But don’t you find this a bit hard to believe? Take a re-look at the figures.

Firstly, the PMC’s feasibility report says that only 60,077 sq. ft. can be sold by the builders. But the builders’ Partnership Agreement, an internal document, states that the total area is 1,07,772 sq. ft. of which 67,000 sq. ft is available for sale i.e. 11.5 per cent more saleable area. This makes it much more profitable!

Secondly, the sale price as mentioned as Rs 14,000/- per sq. ft. in the Partnership Agreement and also in the PMC’s feasibility report, is a half-truth. The other part of the truth is revealed by page 33 of Shree Gurukrupa Nagar’s Development Agreement which says that if society members wish to buy more space, then the price is Rs 24,300/- per sq. ft. The Agreement also says that if the society members want less space than their entitlement, the builders will buy their space @ Rs 14,000/- per sq. ft. So, the real minimum sale price of the Sale Component cannot be Rs 14,000/-, it is at least Rs 24,300/- per sq. ft. Another big jump in profits!

In fact, the real profits appear to be nine times higher than the PMC’s estimate!

Real Profit Calculation

What is the Cost of a redevelopment project? It is the total of the costs of its Rehabilitiation Component and its Saleable Component:

A. COST = Rs 55.89 crore (18.37 plus 37.52 cr)
1.      Cost of Rehab component = Rs 18.37 crore (17.50 crore plus 87.5 lakhs) Explanation: Stamp duty of Rs 87.5 lakhs was paid on the project @ 5 percent calculated on the consideration to be paid to society members. The consideration amount was adjudicated at Rs 17.5 cr, based on all the considerations given (or to be given) to the flat owners by the builders in cash or kind, and/or Ready-reckoner rates of the land. Rs 17.5 cr may be considered as the total cost price of the rehabilitation-component to Concrete Siresukan Realty LLP, including construction cost, corpus fund, rent and brokerage for alternative accommodation, shifting charges, and other incidentals. (Please note that we have made allowance for a couple of crore rupees more than the PMC’s estimate.)
2.      Cost of Sale component = Rs 37.52 crore (27.11 plus 10.41 cr) Explanation: Construction cost @ Rs 4000/- per sq. ft. as mentioned in the Partnership Agreement, on 67,772 square feet is Rs 27.11 cr. This includes architects’ and other professional fees and incidental costs. To this amount, we add the cost of buying TDR i.e. Rs 10.41 crore as per the feasibility report.  (Please note, we are assuming all cost-related figures on the higher side, i.e. 67,772 sq. feet, and not just 67,000 sq feet, and Rs 4000/- per sq. ft., and not just Rs 3000/-. In short, we are estimating costs on the higher side.)

B. REVENUE FROM SALES = Rs 165.31 crore (93.80 plus 69.01 plus 2.5 cr) 

1.      Cheque Rs 93.80 cr: The official sale price is Rs 14,000/- per sq. ft., and so the total amount realized by cheque after selling 67,000 sq. ft. will be Rs 93.80 cr.

2.      Cash Rs 69.01 cr: Page 33 of the DevelopmentAgreement says that if society members wish to buy more than their entitlement, then they may do so at Rs 24,300/- per sq. ft. Moreover, the Development Agreement says that if the society members can sell their space to the builder @ Rs 14,000/- per sq. ft. So the real sale price is Rs 24,300/- per sq. ft. The difference between the two rates (24,300 minus 14,000) would generally be recovered in cash from new flat buyers. The amount realized in cash after selling 67,000 sq. ft. will be Rs 69.01 cr.

3.      Cash Rs 2.5 cr from sale of parking  areas.  The illegal activity of selling 50 parking spaces @ Rs 5 lakh apiece is mentioned in PMC’s feasibility report. It will be a source of cash income of at least Rs 2.5 crore. Parking spaces are unofficially sold against cash payments. Such sale is totally illegal, as parking spaces are part of the society’s common amenities, as clarified by Supreme Court in 2010.

C. TOTAL PROFIT Rs 109.42 cr. (165.31 minus 55.89 cr)

Profit is revenue minus cost i.e. Rs 165.31 cr minus Rs 55.89 cr. This amount consists of Rs 40.41 crore received by cheque, which will be shown in the books of account as PROFIT-BEFORE-TAX, and Rs 71.51 crore in cash, which will be in “Number-two books”.

Rs 71.51 crore cash available for bribery

Two officials of Maharashtra Govt's Cooperation Department T-Ward Mumbai – Mr BK Yelhare and Mr Milind Soble – were instrumental in giving the crucial 79A Certificate to Concrete Siresukan Realty LLP on 20 June 2014, when it did not even exist, and was not even eligible to open a bank account or write an official letter, let alone bag a 100-crore-rupees contract! The LLP firm came into existence only on 14 July 2014, when it received its certificate of incorporation. How could seasoned government officials award an eligibility certificate to a non-existent firm without first checking the documents of the firm? How could a government department enable a Concrete Siresukan Realty LLP to execute a contract for demolishing and rebuilding the houses of 72 families, when that firm did not even exist on paper?

Concrete Siresukan Realty LLP (belonging to Concrete Group) had not participated in the tender of Shree Gurukrupa Nagar CHS. Nor had it written a single letter to the society. Then how could it be deemed to have been selected by the society? Neither Mr Yelhare nor Mr Soble took the trouble to examine any papers before giving their green signal for the deal.

Also, the housing society’s office-bearers -- Chairman Mr Anil P Shah, Secretary Mr Sanjay N Jadhav and Treasurer Mr Nehal G Gala – accepted Rs 1.53 crore as the bank guarantee. Is it out of sympathy for the builders’ financial hardships and implicit trust in the builders’ integrity? Or are the office-bearers confident of being able to construct 72 new flats with only Rs 1.53 cr, in case the builders fail to do so?

The smell of bribery lingers in the air like a bad stink.

Krishnaraj Rao

To read previous press releases on this Concrete Group Redevelopment Project, go to:

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