Due Diligence. Rebuilding your old apartment?

If you live in an apartment that was built ages ago, you may be keen to re-develop and upgrade to a brand new one. But a lot of work is needed to turn this dream into reality.

The land associated with your apartment complex is jointly owned by many occupants. You therefore need consent from all the home-owners in the complex to proceed with the rebuilding. Home owners will need to jointly agree on amenities and financial terms they require. This includes the carpet area offered to each owner, any compensation paid for relocation, rent during the construction period and any extras, such as woodwork which are part of the deal.

But zeroing in on the right developer is the most difficult part of the deal. If office bearers in the housing society and home owners want to research market rates and regulations before hiring a developer, they may consider engaging a project management consultant. Consulting fees usually average around ₹200 per sq ft, but may vary based on their reputation and scope of work. The society can invite bids by placing an ad or reaching out to developers.

Different developers may offer different terms. For instance, there may be a choice between an offer for higher carpet area and another with higher monetary compensation. Developers may also throw in perks such as helping to pay-off loans outstanding. There may be differences in the way the deal is structured too. For instance, developers may offer to buy the society’s entire land holding to cover construction costs. In such cases, the land is not divided between the home owners and the developer in a particular ratio, but the transfer of land ownership happens right away. This may have an implication on tax liabilities though.

Hitesh Salian, Vice-President, Square Yards Consultancy, a real estate advisory firm, says that due diligence on the developer is important. He says that you must ensure that the developer has a strong balance sheet to arrange for funds and complete the project even if the market is in a downturn.

You can assess this indirectly based on the projects currently under construction, their sale status and sources of funds, besides directly asking for the financials filed annually.

Ramesh Nair, COO – Business and International Director, JLL India, advises that qualitative aspects of the developer, such as past experience and track record in redevelopment, must not be overlooked. The connections the developer has in obtaining approvals and getting local contractors could have a bearing on completion. Doing a reference check of at least two or three other societies where the developer has constructed and delivered projects would be prudent.

After selecting a developer, a construction contract must be signed with the developer. It is best to spell out all the terms, including amenities the timeline for completion and penalties for delays. The exit clause is an important aspect as well. For example, most contracts typically only state that the home owners can walk out if the developer did not complete the project on time. But there may be other reasons, such as poor quality or change of plans, that may prompt the owners to consider quitting too.

Nair says that the development agreement must incorporate all the standard clauses that safeguard the society and its members. In Maharashtra for example, the Co-operatives Act specifies items to be included in the agreement, such as a bank guarantee from the developer for the equivalent of 20 per cent of the total project cost and not ‘selling’ the agreement to another developer.

In a redevelopment, remember, you are making the entire payment upfront (by way of giving up your share of the land). Therefore you must ensure that the contract mentions a completion timeframe and the recourse if these are not met.