Redevelopment of properties of existing co-operative housing societies began a few years ago, and is now a popular way for demolishing old, dilapidated structures and constructing new in its place. Here, the new structures are offered free to existing members, while the additional plot/flats are sold by the builder/developer for profit, thereby unlocking value from the property.
In case of redevelopment, the considerations for existing members range from extra amenities to extra space in the reconstructed property that enhances the life of a building. Extra area allotted by the developer is just one of the myriad considerations offered to existing members. The construction of a fresh structure in place of an older one itself forms consideration enough for redevelopment.
A ready reckoner for redevelopment
For a redevelopment project, there are a series of objectives that need to be fulfilled in a particular order. Here goes a reckoner on how to go about doing it:
- Firstly, the members need to finalise the list of amenities that will be provided by the developer through the redeveloped project. After this, the tender documents need to be drafted, discussed with members of the committee and finalised.
- Once this is done, tenders both technical and commercial need to be invited from among developers after doing the technical evaluation and generating a comparison statement where necessary before short-listing a few developers.
- After the builders/developers are short-listed, joint meetings have to be held along with the committee members before finalising the most suitable developer for the project. A letter of intent, based on the terms negotiated with the concerned developer needs to be issued. The measurement of each flat and carpet area of each member has to be ascertained.
- Also, requirements of each member need to be taken down and tentative drawings prepared. A detailed survey too needs to be carried out. A list of solicitors, legal consultants and tax consultants needs to be drawn up for reference and legal action in the future.
- Agreement formalities between the society and the developer as well as between the society members and the developer need to be completed. The layout of the entire plot should be finalised; approved from the civic corporation and building files submitted accordingly. The society also needs to obtain CCs (Commencement Certificate) where necessary. Importantly, the plans to be finalised have to be as per member requirements. This has to be followed by obtaining approvals on finalised plans and CCs for the same.
- The members need to be shifted to a temporary accommodation while the project is afoot. The old structure and building need to be demolished after which a soil exploration takes place. This is followed by the construction of new buildings and associated infrastructure such as access roads, recreational facilities, playgrounds, parks and compound wall with gate and concrete pavement and watchman cabin.
- The Occupation Certificate (OC) has to be obtained along with a permanent water connection and water supply metre. After this, the site has to be cleaned thoroughly and possession handed over to members after confirming the carpet areas of newly constructed flats.
Do your homework before entering into that redevelopment agreement
A redevelopment agreement, as the name suggests, is an agreement for the restoration of an old building between the residents and the developer. But, it’s not as simple as it sounds; the housing society needs to exercise necessary caution to ensure that the residents’ interest is safeguarded.
“Even seemingly simple things such as getting the redevelopment agreement registered with the sub-registrar or then, paying proper stamp duty are very important in such a deal,” says Navdeep Co-operative Housing Society secretary, Girish Pradhan.
In most cases, the developer negotiates the deal of restoring an old building with the managing committee of the society. “In which case, the onus is on the managing committee to ensure that the interests of the residents are protected and they need to take all the precautions,” offers Pradhan.
“It’s advisable to discuss the agreement in detail at the general body meeting so as to arrive at a consensus about the terms and conditions in order to avoid later hassles,” he maintains.
As with any property dealing, when it comes to redevelopment contract, it’s of utmost importance to ensure that the developer has a sound reputation. “If possible, the members of the managing committee must visit the site of some of his previous projects, so that they get first-hand information about the developer,” says the CHS secretary.
Considering that the property of so many residents is at stake, it makes sense to seek the help of professionals in getting a clear picture about the agreement that the society is entering into.
Sound advice from professionals such as lawyers, architects, engineers before signing on the dotted line is sure to help the society make a responsible decision. It is reasonable to hire the services of a technical supervisor who can keep a check on the work done by the developer.
In order to ensure the smooth implementation of such a contract, the respective obligations of the developer and the CHS members and the consequences of the breach, if any, need to be put down in writing clearly in the agreement.
For instance, the time of completion of the project and the consequences of non-completion in the stipulated time must be specified in the contract so that the developer doesn’t drag on the work.
Redevelopment modes and taxation
When a cooperative housing society undergoes redevelopment, their taxability depends on the mode of redevelopment they choose.
When a society appoints a developer for reconstruction and pays the developer to reconstruct it, there is no scope of income for the society. Very often in these situations, the society allots additionally constructed flats or floor space index to members at a subsidised cost, market price or even free of cost. In such situations, there will not be any taxable income to such members since they would be covered by the concept of mutuality. Individual members who choose to sell off any such additional flats though would be liable to pay tax in the usual manner.
Even in situations where the society decides to lease or rent the flats arising from the reconstruction for the rent and security deposit, the deposit would not be liable to taxation. Since the rent collected in such situations would be the income of the society under the ‘income from house property’ tag, this income could be set by collecting lesser or no contribution of monthly maintenance from members.
Common developer and individual members
When a redevelopment project generates additional flats as a result of re-construction, they may be made available to members with or without cost. In such situations, the individual members and not the society would be liable to pay tax.
Society contracts with a developer
In this situation, the society and the developer enter into an arrangement where the developer reconstructs the building of the society giving members their flats rebuilt free of cost or even pays an agreed sum to the society or individual members. In these situations, it’s important to remember that the entitlement to balance FSI and the right to use TDR are assets that belong to the owner of the land. Under section 2(47) of the Income Tax Act, allowing a developer to use such rights would be considered as a ‘transfer of assets.’ The consideration received from the developer for such a transfer of assets would be taxable under Capital Gains.
As per the law, a duly registered cooperative housing society is the owner of the land and its buildings. And since the society is the legal owner, the consideration received for the transfer of assets would be taxable for the society even if the developer does not pay any consideration to the society and pays it to individual members.