Wednesday, 7 June 2017

Good News & Bad News for Redevelopment in RERA

7 June 2017, Mumbai: Good news no. 1: Individual flat-owners can complain to RERA against builder. If the rights of even one individual flat-owner (called "allottee" under RERA) are dishonoured by the builder ("promoter"), then that flat owner can just fill up some forms and pay Rs 5000/- as the fees, and seek compensation, interest, etc. and have the builder heavily penalized. Unlike court battles, this is a quick and effective solution. Until the advent of MahaRERA (Maharashtra Real Estate Regulatory Authority appointed as per Real Estate Regulation Act 2016), builders were herding flat-owners like flocks of sheep, because individually, they were voiceless. Only the cooperative housing society's office bearers had a voice, and individual flat owners were helpless. Even the doors of the police and High Court were closed for individuals or minority groups. Now, after RERA, the days of builders and office bearers herding society members like flocks of sheep to the slaughterhouse are over. 

Bad news no. 1: Paradoxically, many redevelopment projects will FAIL when economic exploitation stops! Many redevelopment projects worked only because flat-owners were like sheep. Without exploiting flat-owners, many builders cannot complete their project. Ongoing redevelopment projects may get stalled because of complaints.

Good news no. 2: RERA expects builders to compensate flat-owners for delay in possession. Builders will have to pay high rate of interest to those who booked flats based on a possession date commitment.

Bad news no. 2: Registered Redevelopment Agreements will have to be cancelled or amended. Some projects were planned on the assumption that if they were not completed in 24 or 36 months, then the builder would stop paying alternative accommodation rent to flat-owners. Builders never compensated the flat owners or buyers for any project delays! Now they will be forced to bear these costs and compensate flat owners, and therefore many builders may seek to dilute the terms of redevelopment. Instead of, say, 30% additional carpet area, the builders may offer only 15%.

Good news no. 3: Flat buyers will get an easy exit option if the builder fails to deliver possession in time. Flat buyers in redevelopment buildings will be able to exit from stuck redevelopment projects. The builder will have to refund the flat buyers with interest.

Bad news no. 3: Cost of RERA compliance and accounting is a substantial hidden cost. The effect of MahaRERA is like an earthquake for tens of thousands of ongoing redevelopment projects in Mumbai, Pune and other cities of Maharashtra. With its new regime of penalties and compensations, RERA entirely changes the project cost, and it adds one huge cost -- the cost of compliance. The duty of RERA compliance hangs like a sharp sword over the heads of the builders and estate agents, but the same sword will cut into the extra benefits that were promised to redevelopment flat-owners. RERA compliance and trouble-shooting will have to be accounted as a distinct cost-head, and if a builder fails to account for it, he will fall into a deep financial ditch! The builder will have to project all his cash flows, raw-material purchases and contractor costs accurately many years in advance, and implement them exactly as per projections -- a unprecedented, difficult and costly task requiring precision involving many highly-laid professionals working together. Money received will go into an escrow account, and withdrawals will be carefully monitored. There is no scope for fudging the accounts, because quarterly returns have to be filed. Documents once filed cannot be changed! The cost of a simple accounting mistakes and financial indiscipline can be the total failure of the building project. So accounting, which was only a side function in the building industry, will become a key function -- probably the most important function of all!

Good news no. 4: RERA's financial discipline will prevent builders from squandering funds on big cars, posh offices, huge advertisements, etc. or diverting funds into other projects. Many building projects fail due to financial indiscipline and accounting jugglery between the many companies belonging to each builder (or family of builders). Flat-buyers' hard-earned money goes for funding the extravagant lifestyle of the builder and his family members, and as a result, the projects fail. Now, that will stop! 

Bad news no. 4: Builders will not be able to reduce initial costs by entering into deals with financiers, land owners, suppliers, RCC contractors, etc. by promising them a certain number of flats. Builders often have deals with financiers or land owners for, say, 20 flats in return for finance or development rights. Now such deals will not be possible because MahaRERA deems land owners and financiers in such deals as co-promoters. Co-promoters will have to deposit the proceeds of sales of their share of flats into the escrow account, and so no financier or land owner will be interested in becoming a co-promoter. Hence, builders will have to properly buy the development rights, and enter into proper money deals with financiers without any barter arrangements. This may increase the cost of doing business, affecting the project viability. Ongoing projects where such deals are already in place may get stalled because RERA provisions for co-promoters.

Good news no. 5: Honest builders will find it easier to procure building permissions. A lot of redevelopment projects are stuck because of builder's inability to "manage" the permissions from MGCM's infamous Building Proposal Department, State Govt's Urban Development Department, etc. where bribery is rampant. MahaRERA will call the government officials from those departments to attend hearings and justify why the permissions were delayed. Quicker clearances would enable builders to complete their building more efficiently, thereby incurring less interest costs and delivering possession on time.

Bad news no. 5: Redevelopment projects with indisciplined builders will collapse. A majority of builders currently doing redevelopment projects have succeeded by doing jugaad all these years. Now, after RERA, jugaadu builders will crash, and their projects will have to be taken over by MahaRERA and the association of flat-owners and flat-purchasers. Incomplete projects may have to be auctioned. Finishing these projects will become a huge systemic challenge.

To complete their redevelopment projects and get back their homes, flat owners and flat buyers may have to sacrifice the additional carpet area and corpus funds promised, shell out lakhs of rupees and appoint good professionals and systematic builders. Flat owners used to the idea of getting money and additional carpet area in redevelopment may face psychological and financial difficulties in shelling out lakhs of rupees!

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CONCLUSION: The building industry is entering into intensive course-correction. There will be growing pains for the next few years. Many surprises are lurking in the hazy future. About 95% of builders will be forced to quit the building industry within the next five years. The 5% who survive will be the cleanest and most professional.

ISSUED IN PUBLIC INTEREST BY
Krishnaraj Rao
9821588114
krish.kkphoto@gmail.com



1 comment:

  1. The strength of the Act is directly dependent on its implementation in true spirit.


    If the mechanism itself is corrupt, there is not much hope either. Currently, facing a situation where builder cheated us flat owners, and he filed a revision petition before the joint registrar against our application for society registration...

    We flat owners are daily taking leave and attending court proceedings, we get only board discharges..

    ReplyDelete