Personal Finance

Joint redevelopment of your property

Meera Siva | Updated on January 09, 2018

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Home owners can benefit by working with a builder to rebuild their property

A home is an asset, sure, but beyond its prime, cracks begins to show. You may want a different floor plan or size for your home as your needs have changed; you may want better facilities or hassles such as leaks or clogged drains may motivate you to demolish the old building and build a new one.

Rather than doing it yourself, you can work with a developer to rebuild, without spending from your pocket.

How it works

In a joint development, the house owners enter into an agreement, to construct, with a builder. Typically, the terms are that the builder is given a share of the land in exchange for the cost of construction.

Say, an apartment complex with four flats of 1,000 sq ft each on 2,400 sq ft land is to be redeveloped. The terms may be that the owners each get a 1,000 sq ft flat and the builder would construct additional floors and sell them.

The undivided share of land is also now split between the four owners and the builder.

Joint development works for independent houses as well. The owner can get 2-3 homes and developer can build 2-3 more. Usually, a single family home is redeveloped into an apartment.

The builder may also typically make upfront payment to owners. They may also pay rent during the construction period. The terms — initial amount, monthly rent, ratio of builder vs owners share — depend on a lot of factors. For example, a property in a prime location with sizeable land in a hot property market gives home owners some strong bargaining power. One advantage of joint development is that you can get a new home that fits your current needs, without having to worry about arranging money for construction. Also, for many elderly people, joint development can help unlock value from their home and provide some amount of cash to cover their other expenses.

Tax issues

When there are likely gains, taxes need to be paid. In Budget 2017, tax rules relating to redevelopment were simplified in favour of home owners.

From 2017-18 onwards, for an individual or a Hindu Undivided Family, the date of transfer of property is when completion certificate is obtained. Hence the liability for paying capital gains tax arises only in the year in which joint redevelopment is completed.

Earlier, profits from sale or transfer of property became taxable in the year in which the transfer was made. So, entering into a written agreement with a builder was itself considered as a transfer. However, even after the change brought in in this year’s Budget, if the owner transfers his rights before project completion, capital gains and holding period calculations are based on the year in which the transfer happens.

Handling risks

Besides tax, there are other issues and risks to consider, given that redevelopment is a lengthy process that may stretch over a few years. For starters, if your home is part of a multi-family unit, all home owners must agree to go through redevelopment. The process of getting consensus on the terms from all the stakeholders may end up being a long-drawn one.

It also helps to do market study to know the going rates and terms in your area before you look for a builder. And while good payment terms are important, you must not compromise on builder quality. You must thoroughly verify the reputation, local expertise and delivery capability of the builder. The details of the proposed building must also be specified clearly to avoid misunderstanding.

Owners must also consider the market condition in the local area. If demand drops, there may be delays as the builder may not be able to find buyers. In that case, it may be better to wait or be prepared to deal with stretched time lines.

Go through the agreement with the help of a lawyer to ensure that you are protected. Among factors to keep in mind are the rights of developers on the land and penalties for delays. The builder is granted rights to enter the premises for development, through a general power of attorney. This can be revoked if the contract terms are breached; but, it must be registered to be legally binding.

The writer is co-founder, RaNa Investment Advisors

Published on November 11, 2017

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