MUMBAI: Inherited property can be touchy territory. If you have a land parcel that was bequeathed to you, chances are that you will be in two minds about what to do.
On the one hand, you will be emotionally attached to it, but you will also loathe keeping it idle. Joint development with a builder may be a great way to have the cake and eat it too.
Without having to relinquish ownership rights, the deal can be sweet, so that you can personalise it to serve your needs. Take the case of Vijay Mallya who did a joint development with the Prestige group for his ancestral home in Bangalore’s prime locality. The property, in which Prestige got a 45 per cent stake, was developed into an uber-luxurious 34-storey building with 82 apartments.
Mallya received, among other things, a two-level split penthouse with a wine cellar, pool, a helipad on the roof and a separate entry with private garden, lobby and lift.
With a large property sliced into smaller portions, managing it can also be easier. You can sell the small units without much difficulty. Alternatively, as a business owner in Chennai did, gift the units to your best employees when they retire.
You may also be able to pocket neat gains from your share of the development. By partnering with a reputed builder, a lot of value can be added to your empty plot and you can enjoy the share of the profit. A typical 10-15 acre parcel, which takes four years to develop, can fetch returns of about 18 per cent per year, about double of what you gain from land price appreciation alone. “Most of the landowners have been able to achieve these numbers in Bangalore and Chennai,” says Shreekant P Shastry, Vice-President - Business, Ozonegroup, a Bangalore-based developer.
You needn’t fret that unlike Mallya, you don’t have acres of prime land in a metro. You can rope in a partner for land in the suburbs and small plots in prime locations as well.
Tier-2 cities such as Visakhapatnam and Coimbatore also witness a lot of joint development activity, says Nitin Goel, Real Estate Investments, Milestone Capital Advisors, a private equity fund. He says that while size is not a limiting factor, such deals make more sense if it is a ‘high value transaction’, where the land cost is over ?5 crore.
It helps to deal with a trusted builder who you know personally. Mathew (name changed) inherited large tracts of land in the outskirts of Chennai and decided to develop them in partnership with his good friend, who was a builder. After entering into the deal, the market turned soft; the two of them discussed the situation and deferred development by two years. Mathew says that a lot of friction was avoided due to the trust that he had in his business partner.
Before entering into an agreement, consider the reputation of the builder, delivery capability and the specification of the proposed building, advises Goel.
Also, ensure that the builder you are signing the deal with has local expertise. Often, a builder who has built a brand in a certain region may not be able to replicate that in a new city.
Ensure that your obligations as the land owner and responsibility for obtaining approvals and executing, is discussed and laid down in black and white. For instance, if your land is classified as agricultural land, you cannot enter into a development agreement unless the certificate of conversion is legally obtained.
There may be other legal hassles as well; so a sound legal contract spelling out the terms of the agreement is mandatory, even if the developer is your bosom buddy.
This will avoid misunderstanding or disputes about what the constructed area really is. As the land owner, you must remember that the sole ownership of the land lies with you.
“The builder is only granted rights and licence to enter the land for the purpose of development and not as a buyer,” says Himanshu Shekhar, Managing Partner, Vipra Legal.
The authority to enter the land is given by way of a general power of attorney (GPA) in favour of the developer. This should be registered for it to be legally binding. You can revoke the GPA if the builder breaches the contract terms.
While well-drafted contract terms can shield you from legal trouble, you certainly need the help of a good accountant to avoid tax hassles. Joint developments, it turns out, offer a fertile ground for tax disputes.
“Litigation arises when they are determining the point of taxability and the date of transfer, as the land owner contends that only the development rights are shared with the developer,” says Rakesh Nangia, Managing Partner, Nangia and Company.
The quantum of capital gains is also tricky to determine, given that a chunk of the gains cannot be quantified at the time of inking the agreement.
He advices that since tax authorities follow what is popularly known as ‘substance over form’ principle, the way to protect yourself is by drafting the agreement with an eye on tax and accounting considerations.
In the end, it is not just you as the land owner, but the other party — the builder — who also has a vested interest in ensuring that the joint development gets off the ground.
Goel notes that land costs are high and builders usually do not have the capacity to pay for the upfront costs.
Finding land with good title and getting money to buy it is no cakewalk. So, joint development with land owners is a great choice for a builder who wants to jump-start a project.
It is true that when you go with questionable builders, you may discover that delays, deviations, and reneging on payments sour the deal and end up in courtroom drama.
But builders want to be ‘seen as a partner, not an interloper’ says Rajesh Krishnan, CEO of Sheltrex, a Mumbai-based real estate group, which recently faced issues with a land owner in its project near Chennai.
Therefore, if you’ve inherited a prime parcel of land, go ahead and look for a real estate partner. But be really choosy about the developer and don’t hesitate to sew up a watertight contract.