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Financing A Redevelopment Project- A Looming Possibility

By Author: Aashil Patel
Total Articles: 33

A redevelopment project usually means an entirely new construction of an existing project wherein the residents may be offered same or larger areas than what they previously owned. The builder involved needs to bear the costs involved which include demolition, reconstruction and other charges. The profit to the builder is mainly from the extra FSI or the TDR.

While buying an apartment many customers use home loans to fund the purchase. A project when approved by a bank / financial institution is helpful for the customer to get easy finance. Even when the customer is not looking for funds a pre-approved project would mean that the bank / financial institution has done due diligence and it’s safe to invest here. This assurance comes because the bank / FI checks the title documents and construction related permissions.

Up to 2010 banks were not financing redevelopment projects; only finance companies used to do. In 2011 Central Bank started financing and hence now it is as easy to get finance on a redevelopment project as it is for any new project. Ram Sangapure, general manager (retail), Central Bank of India, said, “Under our home loans portfolio, we would fund construction for those parts that the residents would use for themselves. Any construction for commercial purposes or for third parties would be considered as project financing, and have to be approved separately.”Other co-operative banks that have a strong presence in suburban areas, where societies are likely to opt for redevelopment, are also exploring business opportunities in funding redevelopment for societies.

Builders have turned to redevelopment of existing properties since the availability of land is scarce. However, such projects are time-consuming. Since there are a number of people involved in the society, the decision-making process takes more time.

In case of redevelopment there is a minor change in this procedure. There is no title of land as the land is owned by existing residents in parts. So in this case the developer signs the Joint Development Agreement which mentions the conditions based on which he is allowed to construct. This agreement also has the time clause and other details.

Also the underlying land needs to be checked whether the land is leasehold or a freehold. Some of the properties are 50 year old on a 75 year old leasehold land. So in such a case it is risky for the investor. Redevelopment is very much prevalent in south Mumbai and the land titles are not always freehold there.

So it is advisable to invest in a project which has passed the litmus test of bank finance.

Societies are expected to do their homework before approaching banks for a loan. So, the onus of getting all the members to agree on fresh loans under the project and securing the required approvals would be with the society. Such loans would also turn out to be more expensive than regular home loans, since the loan amount would be higher. “Though modalities are still being worked out, the final costs would be inclusive of demolition of the existing structure, relocation costs of the residents and construction of the new property, besides the money spent on registration,” said Sangapure. However, the interest rates applicable would be in line with existing rates in the home loan market.

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