Mohammed Ibrahim
What is Joint Development Agreement?
It is an arrangement between the Landowner and the Builder/Developer, where the Landowner contributes his land and the Developer takes the full responsibility of development including obtaining planning permission from the local authority, dealing with RERA, and other Government Authorities where necessary, construction complete, arranging finance, and marketing and sales. The landowner in return gets the consideration in form of lump-sum or percentage of sales revenue or some specific part of constructed area in the project. It is as per the terms and conditions of the JD agreement. Two types of development agreements: 1). Area sharing joint Development Agreement and 2). Revenue sharing Joint Development Agreement.
Usually, the landowners get 33.33% to 40%, and more of the Gross Development Value (GDV) and even more in upmarket locations. As per the provisions of the Transfer of Property Act 1882, the developer shall not be the transferee or buyer of the development work under the Joint Development Agreement. The ownership still lies with the landowner.
In order to determine whether a scheme is feasible, it is necessary to prepare a development budget:
- How much should be paid for the land?
- What will be the maximum building cost?
- What should be the selling price or rental value for the property?
A speculative developer is considering purchasing a site in Chennai city for construction of a small apartment building and planned to sell six apartments at the prevailing rate of Rs, 20,000 per sq.ft or Rs. 160 lacs per apartment. The cost of land inclusive of legal charges is Rs. 480/- lacs. The developer requires a profit of 16% of the GDV. What is the allowable amount of building cost?
Developer's Budget
A mortgage loan is a loan on real estate that is usually secured by a mortgage.
|
Description |
Rupee Rs. |
Amount Rs. |
|
Gross income: 4,800 sq.ft at Rs. 20,000 per sq.ft/. This represents the GDV Say (A) |
9,60,00,000 |
|
|
Developer's costs:land costs including legal charges Say (C) |
4,80,00,000 |
|
|
Short term finance required for say 2years at a composite interest rate of 12%. Say (D): Any standard Compound interest mortgage loan calculator –terms – number of years 2; number of payments per year 1; or Kindly Refer A. M. Ibrahim online compounding and discounting Tables in 'Excel' – Refer (USCRF Table) Equal Annual Cost factor aka Mortgage constant is 0.59170 or 0.0493 monthly; Original Loan Amount is 480 lac: period = 2 years; number of Payment per year =1 or 12 basis. Therefore 480 x 0.59170 x 2 x 1= 568 lac or 480 x 0.0493 x 2 x 24), which is total payment paid; Interest paid: (568 - 480) = 88 lac. |
88,03,019 |
|
|
Legal, agents and advertising fees at 3% of GDV Say (E) |
28,80,000 |
|
|
Profit at 16% of GDV Say (G) |
1,53,60,000 |
|
|
(A) - (C+D+E+G) ► Say 'H' |
75043019 |
|
|
The reminder is to cover building construction cost, design and supervision and finance required for construction (A - H) ► |
2,09.56,981 |
Data Assumed: ▼ Note: (Floor space index is total built-up area Land extent): Stilt plus G+2
|
Land extent |
F.S.I permissible (Floor Space Index) |
Going land rate in the locality |
Planned selling price |
Planned selling price of one kitchen unit |
|
1 ground or 2,400 sq. ft |
2.00 |
Rs. 20,000/ sq.ft |
Rs. 20,000/ sq.ft |
Rs. 160/- lacs |
Building costs: Assume finance will be required for 1 year at 12% and professional fees require at 10%.
|
Building Costs |
Say 'B' |
|
Finance |
B x 0.12 x 1 year |
|
Fees |
B x 0.10 |
|
Rs. 20956981 |
B + (B x 0.12 x 1) + (B x 0.10) |
|
B + 0.12B + 0.10B) = 1.22B |
|
|
Building cost |
Rs. 2,09,56,981 1.22 = Rs. 1,71,77,853 or 172 lacs or 1.72 Crore Rupees |
Check: ▲ ▼
|
Description |
Amount Rs. |
|
Land cost and Finance |
56803019 |
|
Legal, agent's fees |
28,80,000 |
|
Developer's profit |
1,53,60,000 |
|
Building costs |
1,71,77,853 |
|
Finance |
2061342 |
|
Fees |
1717785 |
|
Gross Development Value► |
9,60.00,000 |
Recheck: Sometimes the developer is able to predetermine the selling price of development, whether or not this is achievable. The question can then be approached in the reverse order:
|
Land cost and Finance Rs. |
Legal, Agent, advertising fees at 3% |
Developer's profit At 16% |
Building cost, finance and fees Rs. |
Gross development value (GDV) |
|
5,68,03,019 |
? |
? |
2,09,56,981 |
Say 'x' |
Let GDV = 'x';
- X = 5, 68, 03,019 + 0.03x + 0.16x + 2, 09, 56,981;
- 0.81x = Rs. 7, 77, 60,000'
- GDV = Rs. 7, 77, 60,000 0.81 = 9, 60, 00,000;
- Legal / Agent's fee = 3% of GDV ► 9, 60, 00,000 which is = Rs. 28, 00,000/-
- Developer's profit = 16% of GDV ► 9, 60, 00,000, which is Rs. 1, 53, 60,000/-
The cost of each unit is obtained by dividing the GDV by the number of units available for sale.
The allowable amount to cover the costs of building is therefore Rs. 1, 71, 77,853/- or Rs. 172/- lac, or 28.67 lac per flat. The construction cost would be Rs. 3,579 per sq, ft; considering today's building costs, this would allow a type of construction which would be of a fairly reasonable standard.
Courtesy:Allan Ashworth, Cost Studies Buildings, published by Longman Scientific and Technical, England (1988).
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