Housing Redevelopment

Many buildings built before 40 to 50 years ago needs extensive repairs and in many a cases even reconstruction has to be undertaken as repairs becomes inconvenient and unmanageable. Therefore, redevelopment of building or group of buildings gained importance. Fortunately, due to certain favourable conditions, the redevelopment has become feasible and some cases even beneficial. In this article, the redevelopment in respect of co-operative housing societies (hereafter referred to as CHS) with special emphasis with reference to its members are only discussed.

Redevelopment has become feasible without CHS and its members incurring any expenditure are due to the fact that in many metropolitan cities the non-availability of land and land prices has shot up. The other facts contributing are that availability of surplus land and unutilized Floor Space Index (FSI), an opportunity to utilize the Transferable Development Rights (TDR), change in usage of land from residential to commercial purposes, etc. These are the ‘assets’ the CHS and its members contribute towards the redevelopment of the project which enables them to get a new house without incurring additional expenditure.

On the other side, the developer mainly brings in the finance, building expertise, and ability to get the project executed after taking required approvals with main aim of earning profit. The cost of construction and the developers profit comes from the sale proceeds of the surplus area built in the redevelopment project. The developers are capable of taking care of their interest and have battery of advisors to maximize their profit. Therefore, the emphasis in this article is to protect the interests of the CHS and its members.

Now, let us take a hypothetical case of redevelopment and work out in mathematical terms for better understanding of the main issues involved. The case taken to analysis is a simple one and should not be taken as model as in reality the things are more complicated.

Let us take an example of a CHS with 20 flats of 600 sq.ft. (carpet area)each. The flat owners desire to have at least 25% more space in the newly constructed building. Assuming that the new building will be ready by 24 months, each flat owner required to be paid Rs.10,000/- per month as rent for 24 months. The CHS wants to have a corpus donation from the developer to its Reserve Funds to meet the additional cost of Municipal Taxes on the newly constructed building. The developer will have free hand and sell the surplus area and the new purchasers will be accommodated as members of the existing CHS.

For the purpose of computation, the cost of construction inclusive of all costs is taken @ Rs.2,000/- per sq.ft. and the market price of the newly constructed building is taken @ Rs.6,500/- per sq.ft. The buildable area of the new building is taken at 30,000 sq.ft. With these, we have the following position.

Area of the newly constructed flats for existing flat owners comes to 750 sq.ft (600 sq.ft plus 25%). Therefore, the total area to be allotted free of cost to the existing tenants comes to 15,000 sq.ft (750 sq.ft x 20).Surplus area available for sale is (30,000 sq.ft minus 15,000 sq.ft)15,000sq.ft The sale price realizable is 15,000 X Rs,6,500 per sq.ft. i.e Rs.9,75,00,000/- by the developer. The developer has to pay the total rent at Rs.48,00,000/- and has to incur the cost of construction @ Rs.2,000/p.sq.ft.to build 30,000 sq.ft area which comes to Rs.6,00,00,000/-. The other expenses including the finance charges are taken at 25% of cost of construction. To make the figures more clear, the same are tabulated below:

Sale price realizable by the developer. Rs.9,75,00,000

Less: Cost to be incurred by the developer.

Rent payable to the tenants. Rs. 48,00,000

Corpus payment to CHS. Rs.1,00,00,000

Cost of construction (30,000 x 2,000) Rs.6,00,00,000

Other overhead expenditure @ 25% of

cost of construction of Rs.6 crores. Rs.1,50,00,000 Rs.8,98,00,000

Profit of the developer. Rs. 77,00,000

The example only gives the broad idea about the redevelopment project. We all know that there are many ifs and buts in a project like redevelopment.

Having considered the basics issues, it is time to consider the preparations to be made by CHS and its members.CHS should first put their house in order by doing homework before venturing into redevelopment. To begin with, CHS needs to consider updating its records by obtaining proper Registration with Registrar of Co-operative Societies. It should also file proper returns under he Co-operative Act, Income Tax Act etc. It is also necessary to clear all the Government taxes, such as Non-agricultural Tax, BMC taxes etc. Obtaining of Occupancy Certificate (OC), getting conveyance in respect of the land belonging to CHS. and updating the land records. It is still better, if the legal requirements for redevelopment is vetted by an expert in Co-operative Laws (Legal Advisor).

After these preliminary preparations, calling for a Special General Body Meeting is necessary for obtaining in principle approval for redevelopment. It is advisable to have the consent of all the members. But, at this stage requisition of more than 70% of the members may be sufficient as the resolution is for in principle approval. Even in often quoted judgment that even one flat owner can stall the proposal is not correct as such member has to prove that the redevelopment is prejudicial to the interest of the CHS and its members. However, having a consensus and working for the common good of all the members is desirable.

After setting the house in order and obtaining in principle approval, the next sensible step is to appoint a competent Architect to evaluate and assess the CHS’s land taking into account the availability of FSI, capacity to absorb TDR, change in usage of land from residential to commercial etc. The Architect who is conversant with the building norms and technical details can assess the total area to be built accurately. Once buildable area in the redevelopment is ascertained, applying the rates prescribed in the Ready Recokner, the total worth of the redeveloped. This exercise should be made before the final proposal is formed or proposals received from the developer.

The basic information in respect of the area to be built would give basis for demanding additional area in the redeveloped project. The surplus areas can also be determined accordingly. The surplus funds generated for the reconstruction of the building can also be worked out. Further, the Architect would be better placed to determine the cost of construction of the new building. It also means that depending on the data available, corpus fund for the CHS and additional monetary benefits for the members can be worked out

Based on the data available, the Architect can formulate a scheme for CHS and its members for redevelopment. With such details in hand a Special General Body meeting can be called for consider the development proposal. In this way, the members can take an informed decision more beneficial to them. At this stage, either the Managing Committee or Special Committee constituted for supervising the redevelopment can take up the project for execution.

After getting the resolution passed, a tender document can be drafted by the Architect in consultation with the Legal Advisor of the CHS inviting bids for redevelopment. It is also advisable to allow the evaluation of the bids by the Architect and the Legal Advisor before it is taken up for final approval.

It is prudent to place the final proposal before the Special General Body meeting and get the final approval and hand over the execution to the committee formed for the purpose of redevelopment.

In the final article, the precaution to be taken in preparing the tender papers, drafting the redevelopment agreement, drafting of Power of Attorney to be given to developer etc., will be dealt with.