Property Collaboration – Livemint – 16-Dec-2014
December 25, 2014 - Uncategorized
The Union urban development minister had recently approved the increase in floor area ratio (FAR) in Delhi for plots above a certain size. The increase—from 150% to 200%—is for residential plots that are 750 sq. mt or more in size. For plots bigger than 1,000 sq. mt, the FAR has gone up to 200% from 120% and the ground coverage has been increased from 40% to 50%. FAR shows how much (according to the development plans and zoning laws of individual states) area you are allowed to construct on a given plot size. Property owners who have plots larger than 750 sq. mt stand to make windfall gains as the rule will enhance the value of the plot. It will result in bigger homes, give a boost to construction on vacant plots, and reconstruction of old properties that had lesser coverage. The change is also expected to augment collaborations between land owners and builders. WHAT IS PROPERTY COLLABORATION? It is an agreement between a property owner and a builder. The property is typically a vacant plot or a dilapidated building or a building that has been built with a substantially lower FAR than what is allowed. Generally, in such an agreement, the builder puts in the money for the new construction while the owner contributes the land. Since the cost of land itself forms 75-90% of a property’s total cost in metro cities, the right over the new building is also shared in more or less the same ratio, say, 75:25 (land owner:builder). This means that if the new building consists of four floors, the land owner keeps three floors and builder will get one. However, this ratio may change depending on land and construction costs. In some cases, the builder may have a larger share if the construction cost is higher, or may have paid additional money if the margin of profit is higher. Through collaboration, a builder can save on capital expenditure since the land will be provided by the land owner. Through such deals, the owner, too, makes a saving, as she is not required to spend money on development. Going back to the above example, the builder not only recovers cost but also earns a profit by selling that one floor. The other three floors remain with the owner. TYPES OF AGREEMENTS There are broadly two types of property collaboration agreements. The first type is where the developer enters into an agreement as an agent of the land owner to carry out the development. The second is where the builder signs a deal for purchase or lease with the owner and simultaneously commences development on the land. This is also known as agreement of sale and development, and is the more common type. If you are signing an agreement under which you will get a certain number of flats (or floors), you will also have to sign a power of attorney (PoA) agreement in the builder’s favour. The builder needs this to get various approvals for construction and to sell the floor(s) or flat(s). The cost of approvals and paperwork is usually borne by the builder.