1. Our OBJECTIVE is not only to roll out the project but to see it getting completed. Never ever, we will want our land to stuck up in the process. So, although fund raising is responsibility of NBCC we should not leave this entirely upon them. Inflow of proceeds and their usable quantum for govt use component is not that complicated a math which we cannot understand. Yes, architecture, design etc. demand special expertise and we may not be competent enough in these areas.
2. Working on Independent Expert’s advice appointed by building committee is always safer, to avoid any likely situations of responsibility fixing on designated authority and building committee in general if, things go haywire on account of unforeseen circumstances.
3. PPP Expert has always been raising the issue on scheduling and phasing since the NBCC was appointed as PMC and model adopted was 1/3rd sale to fund 2/3rd. Technically, we couldn’t understand much for last 7 months regarding gross inflow of proceeds and net available funds (under prevailing circumstances) to construct the govt use component until the meeting with MMRDA on 8.08.2018.
4. The circumstances today, have changed from the ones with the past projects undertaken by NBCC. This can mainly be attributed to RERA coming into play and SC’s directions in some of the recent cases on restricting the diversion of fund where under only up to 30% of fund can be diverted and that too, on fulfillment of certain conditions by developer. RERA Clubbed with DeMo which has caused poor booking response, the NBCC too, is meeting with substantial obstructions in mobilization of funds.
5. Moti Bag project is the only finalised project by NBCC. Other projects, like Kidwai Nagar, Sarojini Nagar, Netaji Nagar etc. and several others are stuck up at certain levels (Minute level discussions with NBCC Mumbai head can bring in more clarity).
6. The DeMo effect on real estate has been tremendous, and the sector has not yet overcome the effect. End effect has it that, actual bookings may significantly vary from the anticipations. It is possible that out of 1900 sale flats in our case, only 500 are booked and the rest of the units take quite a longer time. This may be kept in mind that in any case, the land owner is obligated under RERA to construct the entire 1900 flats on priority to secure Occupation Certificate (OC) and deliver the same to consumer in time frame. Further, Salt pan Wadala area is not a commercial hotspot hence, our proposed Commercial Tower for sale also doesn’t project a clarity on the likely proceeds.
7. DeMo effect has brought stagnation in property booking and various records only show that market is in surplus supply of flat properties. As per sources, Worli is coming up with 10,000 flats built by Tata Housing for sale in open market. So, our project is also likely to face flooded supply with a real estate duress already prevalent in the market place.
8. By virtue of our being the land owner, RERA obligations will apply on Customs Department and the Commissioner(G), representing the department may be subjected to answerable circumstances in the event of things not falling in line with assumptions made. The scenario of answerable situation assumes significance in so far as we will be pushing the NBCC to divert funds realized for sale component to start govt. construction side by side. Its likely that constructions on both sides: Consumer side and Govt. side gets stuck up in the event of fund paucity, given all glaring likelihoods of lesser no. of bookings.
9. To my understanding, under our 1/3rd vs 2/3rd model we are not concerned about the cost escalations and consequent total cost on account of Premiums and Cess impositions. This is because:
(i)When the construction cost rises, this happens for everybody else also and the sale price in the market will automatically go up and consequently sale proceeds will be fetched higher. So, on the paper these two figures can always be shown having matched. In fact, we are concerned about completing govt use component from the net sale proceeds in a ratio of 2/3rd : 1/3rd (DP norms—- 1/3rd sale allowed to fund the govt residences). Wherein, net sale proceeds is subject to several constraints, viz: fund diversion restriction in view RERA and of SC’s interpretations there on, booking responses where constructions are being made by a govt sector agency (Brand Value of NBCC in real estate), booking response in Wadala area (Geo-Spatial value) and the booking response amid flooded supply post DeMo etc.,
(ii)NBCC is going to match the Cost figures with Sale Proceeds under any circumstances (Among the three likely escalations suggested by NBCC ranging from Rs.700cr to Rs. 1900cr, even if we move on with the worst case-scenario of no exemptions to us, the NBCC will easily match up two sides of figures). This needs to be understood that NBCC’s interest is all about their PMC charges. No matter, whatever portion of our project is completed, they will get their due share. Basic religion of any PSU is to secure its profit commensurate at every stage of project in progress. They will always ensure placing of a caveat in MOU, that will allow them to be in profitable situation. We can draw inference from the Mumbai Metro project wherein, Reliance was able to extort almost Rs.4000cr from the state govt. over and above what agreed upon on the face of MOU.
10. Objective of our whole exercise is not just seeking the exemptions and relaxations and bringing down the total cost. Our objective is to make the layout in picture to to be shaped reality with no stucking up midway. Contrary to what is being presumed since long (esp. I was under this impression, being new to the office), this is only a step to make the project economically viable. Hence, apart from steering through prevailing uncertainty on exemptions, a reflect on entire viability is felt necessary after meeting with Deputy Metropolitan Commissioner (DMC), MMRDA dtd. 08.08.2018. During discussion at length with DMC, we were able to understand how the prevailing scenario of market clubbed with RERA can lead our project into trouble. To put it with more clarity, reflecting on overall viability also warrants inclusive reconsideration into our current model of project.
This would be relevant to put it out that among many versions of self-sustainable model discussed, an FSI Auction Model was cited by DMC to be most successful. We could clearly witness from the talks between all participants that the recommendation by DMC was too valid to be argued against by PPP expert, NBCC official and ARCOP professionals. We kind of, found ourselves in an epiphany stage where an entire range of diverse models were uncovered before us. I along with my officer Gaurav present there, penned down observations & revelations of the meeting and this post here, has a direct bearing of the those same observations.
11. NBCC would have no issues- Even if, the FSI auction is adopted as our project model, we are not taking away the PMC job awarded to NBCC. Yes, NBCC will not have to lose the assignment by change of model of project. The only changes will be that NBCC will have to conduct auction of 1/3 of entire FSI eligible for us and then the whole realized proceeds will be directly used for Govt use components. In the newer scenario, except the Sale/Auction part of FSI (Which the winning Bidder will be free to use in an optimized manner, they would wish), the FSI and hence land will be developed through direct involvement of NBCC. Once, the funds obtained from Sale/Auction of FSI, dealing with consumers hence with RERA will be look out of winning bidder/developer and our look out will be only about govt portion. To my understanding, NBCC should have no issue in adopting the alternate model. Our DPR of course, will change under the alternative model, which will feature only govt residences and offices and the RERA compliance innately part of Sale Portion would be steered clear away.
12. At one point of time, the department was even considering selling land and using that proceeds for project. Why can’t we consider sale/auction of 1/3rd of potential FSI? The advantageous position would be that we will be able to ascertain the exact quantum of usable proceeds for Scheduling & phasing of construction which makes of, the financial part of DPR. The consequent DPR will be a clandestine account of Design architecture AND fund mobilization and accordingly, a self explanatory DPR could be put up for approval. This in fact, would also allow us getting a clear picture beforehand as to how much of govt. use component, we are actually going to accomplish in reality.
13. Auction of 1/3rd of potential FSI, can offer one more advantage if auction is conducted judiciously. The entire auction can be conducted in a phased manner. May be, we start with auctioning 1/12th of FSI and go on completing the entire auctioning in four stages (1/12th x 4 = 1/3rd) to meet the gradual requirement of constructions for govt. component. Each subsequent auction would give us the prevailing current rate of FSI in the market at the time of auctioning. This is most likely to give an upward rate each time, as we are not releasing the entire FSI in the market and flood the supply. Further, with growing publicity of the project, bidding can be made more competitive at each subsequent stage of it.
14. Most importantly, we will be able to remain fully transparent with cabinet in getting approval on DPR if the funding has to be raised by FSI auction. Clear picture of inflow of funds beforehand, will enable all clarity on financial part of DPR consisting of phasing, scheduling and contingency etc.
15. An elaborate discussion of a small group having PC and CC essentially, with PPP Expert seems to be of the need of hour to understand things at deeper level before bringing things to the broader audience of committee.
(i) If the FSI auction model (Which by far has been the most successful model for MMRDA as per discussion with Deputy Metro Commissioner, MMRDA) does not convince the group (The only aspect, I am not sure of, as how much of total proceeds would actually be fetched by way of FSI auction – for this most trusted consultant CBRE can be roped in for getting estimates), few other options of self-sustainable model can also be explored that offer clearer picture on funding and hence on phasing & scheduling of construction by keeping us from landing into RERA and SC rulings on diversion of funds.
(ii) In the event of our failure to explore better alternatives, the current model of “1/3rd to fund 2/3rd “ is always an option with us in place. The committee can work more cohesively to make the current model work with added level of vetting and check & Balance at each and every stage.
16. Under our present model, NBCC is only investing 5% which is too insufficient to help take off the project (To my belief at least Rs. 1000 to 1500cr. as external funding is required at initial stage). I am of the opinion that unless the developer is invested in the project, heart and soul required towards completing the project might also remain a fanciful thing and mere whims. The NBCC is not going to invest more than 5%, So, where from the funding required at initial stage would come, is not yet clear from the draft DIB report.
17. NBCC too, has started believing by certain measures that this model is not going to work, without an additional source of funding OR without changing the version of self-sustainable model infested with the multiple constricting factors. And because of this reason, I believe, they are so far not able to incorporate the financial part (consisting of scheduling and phasing of construction commensurate with figures of gross inflow of proceeds and net usability for our part) in the DPR. It feels under some impression, they are hesitant communicating us the de-facto position. Each time we write them for final DPR, they are asking us in turn, as to which proposition of escalated cost they should go with, along with our comments thereon.
18. The best reasons, although must be known to NBCC only as to why they are not communicating us the worksheet of mobilization of funds from sale-able portion to govt. portion at every stage of project, I feel they are not very sure from where the first round of at least 1500cr. will come in. And again, why I consider this preliminary Rs1500cr is necessary is because this very first investment only, when added with proceeds from booking would be able to create surplus to be diverted after each stage of sale-able construction. We may keep in mind that the amount of money above and beyond the requirement for 2nd stage construction of sale component only, could be diverted to first stage construction of govt. use. We are given to understand that diversion of any amount obtained from booking will destabilize the construction of sale-able part itself because in current scenario of Real Estate, 100% booking is next to impossible and this going to prove a recipe of landing into the clutches of RERA.
19. Further, it should be borne in mind that NBCC is our consultant only, standing in place to piece things together, all resources under one roof. They are not an investor in our case at least. L&T and Shapoorji or any big name that will be roped in by NBCC will do only construction work, they are also not investors either for our project model (They will start the construction only, if certain fund is given to them). Every penny of fund is supposed to be raised by NBCC from booking only since our model has been conceived without a an Investor Pillar. If at all, the project ahead is going to rope in any one of these developers as investors also, the DIB report/ MOU should clearly find mentions of their role, responsibility and the Return on Investment (ROI) they agree upon. This all would need to be figured out before we send the project for approval.
20. To my knowledge and market feedback, booking scenario is already in bad shape {refer this Times of India news }. The premium flat properties nearest to our Wadala Enclave is Ajmera. Whose 3 blocks are almost on hold, no new booking is being actualized in lack of Occupation Certificate/OC (for getting OC also, certain parameters of construction has to be additionally achieved which would also require additional fund- The builder is cash strapped, and this is remains the case, when partner investors are already there with Ajmera). Further, even in respect of the blocks where OCs are obtained the booking response is poor and they are offering 12% flat discount. We may not wonder that Ajmera’s booking rate is 21000/ sq ft. while ours has been already been kept on higher side ie, Rs 24,000/sq ft.
21. I feel, the NBCC although intends to make profit in any circumstances and is currently working under some compulsive impressions, it cannot shrug off its responsibility of giving us a true and real picture of viability of the project. They should be asked categorically to present us Economic and Commercial viability report on the project from an Independent Financial Management Services, so that present model if felt necessary can be revisited and can be made sure that the land, once handed over to NBCC doesn’t stuck up in the course of implementation. There are instances, that once construction is stopped under any circumstance with any land tract rendered muddled, starting afresh the project becomes all the more difficult and has been seen inviting troubles of audit upon empowered authorities.
22. I feel, we have not yet tried understanding the articulations of RERA (MahaRERA in our case) in its entirety, which I try simplifying in the manner below:
(i)With RERA having come into play, keeping the proceeds of booking realization in escrow account (that would only require approval of empowered committee) has been ruled out and instead, a self-maintained Separate Account under monitoring of multiple regulators has been mandated. The original bill of RERA although had proposed Escrow account but the ACT in force, mandates self-maintained separate account.
(ii)The self-maintained account will be under check & balance of auditors, Chartered Accountants and Chartered Engineers in contrary to the Escrow accounts, where escrow agent/trustee and the empowered committee had the power to release the fund. The amount in a separate bank account can be withdrawn only after a proportionate completion certificate from a chartered engineer, architect and a chartered accountant. It is also mandated that audit of the bank account has to be got done within 06 months of start of financial year. The Auditors, C.As & C.Es are made equally responsible along with developer, if mis-management of funds takes space.
(iii)Where the project is planned in phases (Like Wadala project)- Each phase shall be considered a standalone real estate project, and a separate registration under RERA is required. Compulsorily, separate account will have to be maintained for each such registered phase of the project.
(iv)Withdrawals shall require to be commensurate with completion of each individual project. Separate accounts for every project will keep 70% of the money received from the buyers. Such funds can only be used for the purposes of construction and land cost. The Chartered Accountant are entrusted with verifying and certifying that 70% of the amount (after setback of charges and Indirect Taxes) collected from allottees/buyers are deposited in the separate account.
A step ahead, in case of an ongoing project, where estimated cost to complete the project is higher than the receivable sales revenue, the promoters are required to keep 100% of the amount collected from the allottees in the separate account. This is the case when no. of bookings is lesser than proposed no. of construction units. By virtue of this provision the developers are forced to use the project accruals for development of the same project and will be unable to divert the amount for any other purpose.
(v)Maha RERA also clarifies that cost of construction of project should not include brokerage and marketing expenses. These expenses should not be borne from the deposited amount. Adding more clarity, only interest payable to financial institutions, scheduled banks, Non-banking Financial Institutions or Lenders on construction funding or money borrowed for construction should be added to the cost of construction.
(Disclaimer: The observations and insights are purely personal, owned by Mahendra Yadav, Supdt./CEC. They do not form the part of official records and communication. This opinionated content holds no legal validity and does not substitute the expert’s advice either. Further, the contents herein are not posted in public domain and are well-guarded by passwords. Also, contents are not supposed to be circulated without prior permission of the content creator. EDIT: After the meeting of building committee dated 15.01.2019, when everybody agreed that BUA sale model was not viable in the existing scenario of Real Estate, this post was open to read for all concerned)