• The aim of this note is to provide a working template that makes the process more efficient, balanced, less time consuming and most importantly less acrimonious and litigious. It is not meant to be an FAQ on redevelopment.

This note is a candid perspective based on keen observations, feedback, experiences and learnings from different stakeholders being real-estate developers, societies, financial partners, project management consultants, lawyers, transaction advisors and tax advisors.

The redevelopment process is both simple and complex…many times made unnecessarily complex and elongated by the various stakeholders. 

This note has four parts that provide a general overview of the issues involved, stakeholder’s perspectives and roles, challenges and risks, and in conclusion proposes some suggestions…with the aim of creating a healthy balance in interactions, thereby improving the likelihood of positive outcomes. 

1. Introduction

While witnessing the current boom in Indian real-estate and in particular Mumbai real-estate, one cannot ignore the key role of society redevelopment. It is the flavor of the last few years…capturing imaginations, bandwidth at different levels, coupled with aspirations and promises…some fulfilled and many broken!

While redevelopment creates media headlines, one cannot ignore the many pitfalls. Over the years, there have been many challenges, which, if viewed positively, can be capitalized on as constructive learning’s.

2. Stakeholder Perspectives and Roles

The key stakeholders in any redevelopment process are the society (members, the management committee and the redevelopment committee), the developer, the financial partner (if any), overall supported by different service providers…namely a law firm, a project management consultant (PMC), transaction and tax advisors. Sometimes, a sustainability consultant may be involved. 

The role of the service providers is key as the entire process of redevelopment requires ‘intimate’ and ‘intricate’ handholding. This is a key component of this note…where lines and roles are often blurred whilst appointing and engaging service providers. This causes innumerable problems while undertaking the process. 

Being practical and diligent about this creates the necessary ‘checks and balances’ in the process, thereby preventing an over-reach by any one key stakeholder or service provider. This in turn helps to bridge the ‘trust deficit’, a key aspect in successful redevelopment.

A. Society 

From a society’s perspective, it is the equivalent of a windfall, to finally put an end to agonizing and costly repairs, by identifying the right developer for the particular micro-market and product, at favorable commercial terms to redevelop the land and building, within a pre-determined timeframe, and with the necessary safeguards built in. 

In the long run, all going well, the society and its members benefit from a state of the art building, usually built using modern techniques, a better façade and elevation features, an improved lifestyle accorded by larger apartments and amenities and in ideal situations with sustainable and green resource management solutions installed. 

B. Developer

From a developer’s perspective, society redevelopment falls under the ‘asset-light’ business model, with the developer not having to acquire the land, and therefore not having to bear any land cost upfront. The focus is therefore on using capital optimally towards project cost, in turn allowing for effective cash-flow management and improved project economics. This in turn allows the developer to meet the commercial aspirations of the society. 

Given the paucity of land and tightening margins due to inflation, this ‘asset light’ approach is preferred by many developers. This translates into 1) redevelopment opportunities 2) joint venture/joint development opportunities 3) development management opportunities.

Developer’s typically finance redevelopment projects with their own equity, external equity (via financial partners), construction finance and sale of the free sale apartments/areas. The right balance of each component is critical to ensure financial closure and the success of the project. 

C. Lawyer/Law Firm

For lawyers and law firms, more specifically those focused on real-estate and its allied areas, a booming redevelopment market has led to the need to shore up their respective teams to handle the additional work, which requires a lot more handholding.

The work entails 1) engaging with the society on the redevelopment process 2) assessing the underlying land title of the society 3) satisfactorily addressing any land title lacunae’s 4) co-drafting the tender document to invite bids from developers 5) advising the society on important legal safeguards 6) drafting and negotiating the development agreement and ancillary agreements. 

D. Project Management Consultant (PMC)

For PMC’s…business has never been better as the entire process of redevelopment requires hand-holding to achieve some semblance of balance in the interactions between stakeholders. Given this, most architects/architecture firms have set up separate PMC divisions to play this role.

In this process, PMC’s have a ‘certain’ role to play, more specifically 1) technical feasibility of a project 2) running the 79A process for the society 3) project monitoring (where and when required). Many times, these roles blur, leading to an over-reach in role-play, and less than desired outcomes. 

E. Transaction Advisor 

This is an emerging role in society redevelopment. Transaction advisors are essentially individuals or firms that have 1) active working relationships with developers on projects or fund-raise 2) understand the financial ecosystem of the developer 3) understand financial economics of the project and the finer nuances of the same 4) are professional commercial negotiators that can facilitate smooth transaction closure 5) have an over-arching understanding of the commercial, technical and legal aspects of the project 6) can represent the society, or the developer, or both.

By involving a transaction advisor in the process, the stakeholders ensure ‘externalization’ of a key component of the process that can ensure 1) balance is achieved in the interactions and negotiations 2) minimal time delays by avoiding and/or managing stalemate situations 3) establishing adequate checks and balances amongst the stakeholders and service providers 4) creating the right balance in the negotiations and the agreement to minimize the risk of future problems. 

Many times, when roles blur…PMC’s or society/committee members attempt to play this crucial role, leading to an over-reach and less than desired outcomes. 

F. Tax Advisor

Society redevelopment entails various tax aspects that need to be evaluated closely from the outset itself, some of which are 1) stamp duty and GST impact 2) tax treatment of additional area 3) tax treatment of corpus/hardship allowance/rent/other aspects.

Therefore, it is imperative to engage a tax advisor/firm to guide the society on  tax aspects of redevelopment, to ensure there are no surprises going forward, as the financial impact, if ignored, could be crippling for individual members in the future.

3. Challenges and Risks

Society redevelopment is fraught with risks. While there are many known problems, I will touch upon some of the issues. Many of these challenges and risks are ‘self-created’ due to ignorance, lack of clarity and an over-reach by the different stakeholders. Without adequate ‘checks and balances’ in place, an otherwise favorable situation can turn disastrous as discussions between stakeholders evolve.

This makes it imperative to have a strategy in place to effectively manage the process to achieve a win-win outcome for both the society and the developer. The key is to bring ‘balance’ to the interactions.

A. Goals

Many times, adequate efforts are not taken to discuss and outline the goals of the specific redevelopment project, assuming one size fits all. Societies often use other projects/societies commercials as their benchmark, least realizing that each situation and project is different.

Societies are urged to be clear in their approach as to what they wish to achieve and build consensus on such goals before proceeding. There is NO ‘one size fits all’. 

B. Transparency/Information Arbitrage

Many times, there is lack of transparency on the part of the society’s managing committee/redevelopment committee, many of whom have vested interests. Many times, there is also lack of transparency on the part of different service providers. This leads to mistrust and inevitably causes delays, litigation and less than desired outcomes. 

Societies must address this transparency and information arbitrage gap to create adequate levels of ‘trust’ amongst members and stakeholders. 

C. Service Providers

The role of service providers is critical in the process of redevelopment. However, the range and role of service providers is not known to all, and general market practices are followed or adopted, which might lead to less than desired outcomes.

Societies typically appoint a PMC and eventually a law firm to run the entire process, least realizing the limitations of these roles. The limitations and in turn blurring of the roles causes problems including leading to an over-reach by a set of service providers, in turn widening the ‘trust deficit’.  It is critical to carve out the roles of the different service providers to a) create adequate ‘checks and balances’ b) to ensure no over-reach by any one service provider c) to blunt the impact of vested interests if any. 

It is suggested to appoint the following service providers. Their roles are outlined in brief below:

1. PMC – to undertake the technical project feasibility and run the 79A process

2. PMC and Transaction Advisor – to undertake the initial commercial project feasibility

3. Lawyer/Law Firm (real-estate focused): to assess the land title and address any gaps, to draft the tender document, to draft and negotiate the development agreement and other ancillary agreements

4. Transaction Advisor: to undertake commercial project feasibility, approach developers for initial feedback on the project, to obtain initial letters of intent/initial offers, to recalibrate the strategy based on the initial offers, to evaluate the project economics from the developer’s standpoint and to incorporate the society’s wish-list in such project feasibility, to co-engage and handle commercial negotiations between the society and the developer, and finally to oversee legal negotiations and documentation

5. Tax Advisor: to advise the society on all tax aspects related to the redevelopment for the society and for the individual members

This ‘externalization’ of the process and appointment of individual service providers, with no overlaps (each operating within their respective silo), can create adequate ‘checks and balances’ required to ensure a smooth process and a better outcome. It would be advisable not to have the society’s managing committee or redevelopment committee play any of these roles actively, to overcome any trust issues and or blunt any vested interests.

In a nutshell, the suggestion is to engage different sets of service providers to play different roles for the two major stakeholders i.e. the society and the developer, thereby creating adequate ‘checks and balances’ in the process. The fees of all service providers can be standardized, milestone based, and transparently agreed, including whether the same is to be paid by the society or the developer. 

D. Documentation

Societies, in a rush to proceed with the process of redevelopment, many times do not set their house in order in relation to title of the underlying land, conveyance/assignment of the underlying land (depending on the land tenure i.e. freehold or leasehold), updating property cards, solving internal disputes/litigations, reviewing and/or procuring sanctioned plans, assessing FSI consumption and/or violations, and expect the developer to resolve these issues for them.

While the developer involvement maybe justified and understandable when costs are prohibitive for the society, unnecessary involvement at this stage can lead to manipulation of the process, and in turn create or widen the ‘trust deficit’. Pertinently, the technical feasibility of a PMC is also dependent on such documentation. 

E. Project Feasibility/Project Economics/Peak Investment

While PMC’s typically aim to educate a society on the broad project feasibility, many times this leads to an over-reach on the part of the society and the PMC to attempt to ‘define’ and ‘restrict’ the profitability of a developer, completely ignoring the cost of capital and risks associated with real-estate development. This might be a futile exercise.

While it is critical to understand the project feasibility and overall project economics, developer expectations and financing mechanisms must not be ignored. As an example, project feasibility is typically presented to the society as an overall profit and loss, whereas most developers adopt the concept of ‘peak investment’ when evaluating a project. 

Peak investment, simply put, is the total equity the developer expects to invest in the project, before hitting the mark of achieving external sales, post which the project becomes ‘self-financing’ i.e. revenue from free sale apartments funds the residual project cost. Any gaps are met with construction finance availed by the developer. 

Therefore, when assessing the project feasibility and project returns, the total profit of the project should be compared with the ‘peak investment’ to understand the project returns. This understanding can greatly help in commercial negotiations whereas this lack of understanding can lead to misinformed decisions. Despite this knowledge, it is critical to find the ‘middle path’…win-win solution.

F. Process - Open or Closed Tender

Many times, there is lack of clarity on the choice of process to be followed: an open tender or closed tender process.

It is observed that if this choice is not exercised diligently, it can lead to a spectacle and further confusion. As an example, if the society is clear on its goals and objectives, it might be advisable to restrict the process to a closed tender process by inviting a limited set of pre-identified developers to bid. Whereas, if there is lack of total clarity an open tender might work best as it is akin to a price discovery process.

Importantly and many times in an open tender process,  developers do not put their best foot forward, fearing an unnecessary bidding war, leading to elongated timelines, over-analysis and eventually a less than desired outcome. Therefore, this choice should be exercised diligently.

G. Financial Strength

While it is important to ascertain the financial strength of a developer, it is important to note that this is not an easy task as developers essentially undertake projects through separate special purpose vehicles (SPV’s). 

Therefore, it is important to have safeguards in place to ensure accountability of the main promoter developer and the main holding/operating company when engaging with a developer. Importantly, the society can insist on the promoter and promoter directors being directors in the SPV undertaking the project. Further, the society can also insist that the SPV undertaking the project is a wholly owned subsidiary of the main parent or operating company of the developer.

H. Project Oversight

Many societies falter with excessive involvement and oversight of the project. Whiles this is fruitful with small to mid-size developers, it leads to a counter-productive situation with larger high pedigree developers. This in turn also leads to unnecessary costs being incurred, not to mention additional and excessive paperwork.

Importantly, there is ample and adequate information that is legally required to be uploaded by the developer on the RERA website, certified by external agencies, which can be sourced at regular intervals by the society. Therefore, it is critical for the society to insist on the redevelopment project being registered under RERA.

Having said that, a critical component of project oversight would entail ensuring that the FSI and its different components are loaded onto the project at pre-agreed time intervals and milestones.

4. Conclusion

In conclusion, one size does not fit all, and each society, before diving into the redevelopment process, should spend adequate time outlining the goals of its members and their desired wish-list, understand the particular micro-market and its specific positives and constraints, set the house in order in terms of title documents, appoint the right set of external advisors to guide and manage the process, create adequate checks and balances, understand the financial feasibility of the project, but work towards a ‘balanced’ situation, which leaves enough incentive for all the stakeholders, and finally adopt a structured and calibrated approach. 

If all these finer points are addressed, the chances of success can be greatly enhanced with the aspirations of all stakeholders being eventually met.

The writer is a Transaction Advisor, with over twenty-five years of negotiating experience in real-estate and other sectors.

Disclaimer - The writer is not attempting to target any one group or participant in the process, but merely aiming to provide some feedback and solutions to create a semblance of balance in the interactions, which could lead to better outcomes for all concerned.

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