Follow ground rules checklist before signing redevelopment deal

Reference: ET   DT -15/06/2010


With property prices sky rocketing, it's tempting to hand over your building for redevelopment. Here is the checklist before you sign pact with the builder.


Apartment owners in old buildings have landed a windfall, thanks to runaway property prices and an increase in floor space index — the ratio of permissible built-up area to plot area. 

Developers are now approaching residents in old buildings for permission to put up a new construction with more apartments in exchange for money or a larger house. Following are some basic facts you need to check with respect to redevelopment before you give your consent to the developer. 

Has the builder got the capital? 

A redevelopment project is highly cash intensive. The developer has to come up with the cash to fund a one-time settlement or to foot rentals for the period of construction in addition to the actual cost of construction. “The builder should have huge cash surplus, otherwise society members would be in trouble with respect to their stop gap accommodation,” says Sanjeet D Narain, managing director, Narains Corp. 

What’s the commercial gain? 

“Before you negotiate with a developer, you need to establish the market value of the property you will receive on completion of redevelopment. 

This is a better approach than quoting a random figure to the builder that would make them feel short changed or the high amount would make the builder shy on the new project,” says Ashutosh Limaye, associate director (strategic consulting), Jones Lang LaSalle Meghraj. 

“Once the builder gives a detailed plan, the society members should consult real estate consultants and the developer about the likely future price. Based on this, the society members have to do some calculations to check on the commercial gains. 

Need for an air-tight agreement 

You should appoint a lawyer before signing a contract with the builder. The contract should clearly mention the obligations of the builder and the society members and the penalty or consequences of any breach of the contract by either of the parties. 

The housing society should insist on a bank guarantee, which would take care of monetary compensation because of a delay in the project. 

The agreement should also mention the time of completion of the project, the size of the new houses, the mode and the nature of monetary compensation, if it’s a one-time payment, reimbursement of rent or a mix of both. “It usually takes a year for a builder to convince the society members and take an in-principal approval. 

But society members should ensure the timely completion of the project, which is the most important detail to be mentioned in the agreement,” Mr Narain adds. Secondly, it should clearly state the nature of temporary alternate accommodation and mode of rental payment/reimbursement. Finally, it should include member’s choice of new flat, parking, entitled area, etc. 

What are the tax implications? 

Unlike buying a home, there are no standard tax guidelines for redevelopment cases. “It depends on the agreement. Ideally, the members of the housing society should show a copy of the agreement to a chartered accountant before preparing the final draft,” says Vaibhav Sankla, executive director, Adroit. 

Broadly, there are three main tax issues. One is capital gains tax, which could arise out of exchanging the old house for the new one although the house is built on the same piece of land. Under Section 54, you have to invest the amount of capital gains in a residential house within two years from the date of sale. 

Second is the tax treatment of the upfront lump-sum payment. “If that payment is treated as capital receipt, it’s exempted from tax. On the other hand, if it’s treated as revenue receipt, then the amount is taxable in the hands of society members. This again depends on how the compensation is worded in the agreement,” Mr Sankla adds. 

Thirdly, there is no clarity on the tax treatment of the rent reimbursed to society members by developers. “There are a number of litigations lying in courts with respect to taxability of monetary compensation and capital gains arising out of redevelopment. Hence, clarity is still awaited as it’s an evolving issue,” he adds.