Over the years, lot of Societies and public at large have burnt their hands in the process of Redeveloping their buildings. Lot of projects have been languishing unattended for years with the members having to bear the brunt of the delays due to the misadventures or mismanagement of the Developers to whom they had entrusted the Redevelopment of their buildings.

In other cases, the Societies feel that the profit margins in Redevelopment are quite high and the Developers are refusing to pass on the benefits to the existing members. If you view the issue from the standpoint of the Developers, they feel that the Government / MCGM policies keep changing from time to time and the effect of which is applied retrospectively, which results in majorly denting their profit margins and hence they need to keep a reasonably healthy margin to begin with.

Recently, to overcome the above obstacles, the Government has come up with a policy for Self Redevelopment of Societies, which is carried out by the Society itself thereby eliminating the role of the Developer and the Societies dependence on them. However, the Society being an entity with multiple members, most of whom are non-technical and have no clue of Redevelopment process, Self Redevelopment has its own set of unique challenges. The lack of technical knowledge may be covered up by appointment of a Project Management Consultant (PMC) or an Architect. However in the Real Estate industry, there are multiple issues which a Developer faces day in and day out which need a different skill set than just technical knowledge of the construction and liason process. Many Societies have now come up with a more practical idea of appointing Developers as the PMC for their project, wherein they are able to make use of the Developers skill sets while keeping the entire financial control in their hands thereby ensuring that the project will be completed as planned.

Mumbai District Cooperative Bank Ltd. Has taken up the initiative of financing Societies for Self-Redevelopment process. The loan is directly given once all the formalities are over to the Society directly by mortgaging their land and hypothecating their upcoming project flats. Salient features for taking the Construction Loan from Mumbai District Cooperative Bank Ltd. for Self -Redevelopment are as below:

- This is only possible when 100% members give their unconditional consent for the process.

- Bank gives finance upto 85% of the project cost upto a maximum of Rs. 50 Crores.

- The Society and all of its members should not be a defaulter of Bank or any other Credit Societies.

- Loan period if upto 7 years, out of which the first two years shall be moratorium period (i.e. you don’t need to physically pay interest in the first two years).

- Interest rate shall be min. 12.5% but the Bank board shall take a final decision after assessing the risk, etc.

- It shall be necessary for the Society to execute English Mortgage of all its assets, buildings, premises and all expenditure required for the same shall be incurred by the Society.

- Payments shall be made to various contractors, consultants, vendors, etc. directly from the Escrow Account to be opened in the Bank upon certification of the PMC and Architect.

- Bank shall charge interest every month and after two years, first the interest shall be recovered and only after the interest is recovered shall the Bank start recovering the Principal amount.

- Out of the revenue received due to sale of flats, the entire amount has to be deposited in the escrow account. Out of this amount, 60% has to be used for paying interest / returning principal loan amount to the bank and the balance 40% can be used to pay directly to the various contractors, consultants, vendors, etc.

- The flats in the New Building cannot be transferred or sold or mortgaged without the prior permission of the Bank till the entire loan has been cleared by the Society.

- An indemnity agreement will have to be signed by the Office Bearers of the Society stating that they shall be jointly and severally responsible for repayment of the loan with interest to the bank.

Many Developers have now come around to the idea of working hand in hand with the Society to carry out Redevelopment as their Project Consultants where they effectively carry out the entire process of Redevelopment at a fixed cost or a percentage of the Sales Revenue (also known as the Development Management model or DM model). In many ways, it’s a win – win situation for both the Developers as well as the Society. The Developers are happy as they do not have to raise finances and are not affected by any negative ruling of Government or MCGM. They can therefore offer to work on much lesser margins. Society in turn is happy that they are assured that the project will not get stuck due to any financial mismanagement of Developers and also they can hire the services of a reputed Developer at without having to give away a larger profit share.

At Mesacon, we are willing to offer our services of assisting Societies in their pursuit of Self Redevelopment on mutually agreeable terms.