This article is written by Papai Rajak, pursuing a Certificate Course in Real Estate Laws from LawSikho.

Introduction

There are different types of players in the Real estate market and the legal structure of every company varies depending upon which segment or which service they are catering to in the real estate field. There are different type of real estate company like:

1. Developer
2. Investor
3. Financer

For example, if developer considers:

Developers structure their company as per the upcoming or ongoing project requirement. For example, developer introduces new companies under MCA and use them as property holding company in multiple parts to bypass urban land ceiling act, means to avoid fixing the maximum size of landholding that an individual/family can own, Land over and above the ceiling limit, called surplus land. if the individual/family owns more land than the ceiling limit, the surplus land could have been taken away by the government (with or without paying compensation to the original owner). Purchasing the land under different companies and carrying construction works under different company names with the execution of a power of attorney and development agreement is a regular practice. Once the project is completed and handed over to the respective buyer through sale deed execution, those companies names and activity completely come to an end. There are enormous of such companies under scanner who are termed as Shell Companies and they don’t have any existence apart from holding the property.

Developers purchase small pieces of land under different company names and later on amalgamate the same for construction purposes. Most of the directors are common in these companies. Purpose of such a structure is to minimize any adverse effect because of any unseen legal issue, financial damage, compliance of laws or to protect reputation. If a subsidiary company fails to meet financial obligation and becomes bankrupt, that impact should not reach the parent company. Thus it is better to manage risk by equally distributing in different companies.

It is also easy to raise funds through multiple companies and not through a single entity. Investors can put their money in different projects and in different companies as per performance.

This structure also separates the personal assets of directors from the company’s asset as well as liability. Commercial real estate companies are great examples of a business type that can flourish using different organizational structures. While certain key roles, such as that of the head licensed broker, may overlap, other attributes of the structure can be completely different. Based on the market area and size of the business, as well as the demographic it is trying to serve, one structure may serve to be better over the others.

Operational structure

Apart from above structure, a real estate company is also connected with different other agents, govt authority, financer etc which can be broadly categorized into 6 components as mentioned below:

• Development

Development is the main activity which is as equal to the manufacturing unit of any company and a very important part as it will deliver the final quality product. The main objective of this unit is to identify the right land without encumbrance, procure the same in discussion with legal experts, negotiate with land owners, and understand future value of the property, geographical location, and future opportunity of local area development by government authority.

This requires expertise in different fields of real estate and procurement of land must be selected very carefully in order to avoid any future claim by an individual or government. This part is responsible for end to end project completion and it is handled by on roll employees of the company. Development team coordinates with all other counterparts like lawyer, CA, Advocate, Government body, construction vendor to get approval from different levels and carry on construction activity in compliance with RERA and other regulatory authorities.

• Sales and marketing

This team is mainly responsible to generate revenue for the company. Branding and marketing the project through telecom, print and digital media is very important to generate early and good quality buyers so that cash flow remains stable and sufficient to deliver the project timely. Initial booking is very much important for developers as a major fund is required at the time of the foundation level of the project.

This team is responsible for approaching investors for private finance in the project and future returns which can be expected after completion, also convincing investors that the project will be completed timely and all necessary approval, contingency backup is available for the project. Conduct a presentation to the buyer who will be the end-user of the project and what are the possible benefits by booking the property in early-stage, describe amenities like gymnasium, swimming pool, community hall,  free space, Club, maintenance etc.

Sales and marketing channels also coordinate with banks/NBFC who will fund property buyers whether payment will be construction link or advance disbursement facilities. However, as per RBI master circular, payment to the builder on behalf of property buyer will be construction link only, however, if the project is developing by a government authority or in a joint venture of government, bank or NBFC can fund the project as per time link payment schedule. This team is responsible for intimate buyers about the stage of construction and follow up for payment from customers or banks. Also, this process requires proper coordination with the bank and comply with all documentation for disbursement purpose and approved all new and ongoing projects with the maximum bank and NBFC so that customers can have their choice from which bank or NBFC they want to avail loan facilities.

• Broker/Agent 

Real estate market majorly broker or agent-driven. There are so many brokerage companies who are tied up with developers to bring property buyer, investors for the project and claim pre-agreed percentage as commission based on booking or investment amount. As per RERA guidelines, individual or corporate brokers have to be registered with RERA before performing this activity. Sometimes developers also create its own company separately to save this cost. Agents play a very critical role at the initial stage of the project where booking amounts are very much required for maintaining cash flow and other costs like marketing and construction cost. Brokers are liable for proper guidance to the investor and at the same time they must solve problems or queries raised by investors from time to time in order to avoid property booking cancellation and to safeguard developer’s reputation.

• Property management

These companies are basically tied up with developers for lease, rent out commercial property and enter into an agreement to maintain administrative part and collect rent timely, take care of proper usage by the tenant as per rent agreement clause. They charge a developer for this service. This service is mainly project specific, thus developers need to execute such agreement for each project separately and hand over all responsibilities like management, repairing, accepting rent, coordinating for renewal of rent agreement as and when required.

• Lending 

Real estate sector involves huge capital investment and for that developer needs financial assistance from an institute or other private finance. Irrespective of investor type, everyone verifies the project from all different aspects whether to fund the project or not and what the risk may involve till the project successfully hands over to the buyer. Below mentioned points to be checked by all investors before lending in under construction or newly launched projects.

1. Subject Project under RERA registered or not.
2. All necessary approval related to construction from government authority in place or not.
3. Builder will hand over the project to the buyer within stipulated time or not.
4. Builder will serve PRE-EMI on a disbursed amount on behalf of buyer for 18 months or date of possession whichever is earlier in case of Subvention scheme.
5. Builder will accept all sale considerations in the RERA/escrow account only.
6. Builder will not divert funds from the subject project to another project.
7. Builder need to construct the project as per approved sanction plan & other approval and should not deviate at any situation without prior consent.
8. Lander is not responsible for any impact on Home buyer’s Cibil score because of non-payment of pre-EMI from developer side in case of subvention scheme.

Subvention scheme not allowed by RBI nowadays, hence builder will only get payment from the bank on behalf of the buyer as per construction link and in case of any dispute, tripartite agreement clause executed among lander, developer and buyer has to be final.

• Professional services

Developers need different experts for proper advice to comply with all legal aspects as per law. Few advisors like advocate, charter accountant, architect, civil engineer. 

Advocate mainly performs below-mentioned activity and suggests land procurement and title clearance. 

Land acquisition compliances (Standard)

1. Environmental impact clearance
2. Forest rights clearance
3. Municipal level clearance
4. Biodiversity committee clearance
5. Pollution control board clearance
6. Diversion of forest land clearance
7. Gram Sabha Clearance
8. Public hearing for land acquisition compliance
9. Land revenue office clearance 

And all others as may applicable. For example: 

• Environmental Clearance compliances

Below is the process to apply and get Environmental clearance:

1. Submit the entire project proposal report and site details selected for project purpose.
2. Attach Form 1 and Form 1A.
3. The concerned department will inspect the site and study the proposal report.
4. Upon a positive inspection report, the State Environmental Impact Assessment Authority will pass the approval and put as notice on the state pollution control board website and project proponent website.

Service of chartered account/engineer 

To advise the developer how to utilize fund, received from allottee in line with RERA guidelines and withdrawn by the promoter after it is certified by an engineer, an architect and chartered accountant in practice that the withdrawal is in proportion to the percentage of completion of the project.

Also, the promoter shall get its accounts audited in every six months after the end of every financial year by a chartered accountant in practice, and shall produce a statement of accounts duly certified and signed by such chartered accountant to RERA as per compliance. During the audit it shall be certified that the amounts withdrawn from a particular project has been utilised for the same project and the withdrawal has been in compliance with the proportion to the percentage of completion as certified by the architect. Also, Chartered Accountants can be appointed as legal representative by the promoter to present him or its case before the Appellate Tribunal or the Regulatory Authority.

Conclusion

An organized real estate company must have all of the above-supporting departments to carry out procurement of land, necessary approval, marketing, quality and timely construction, statutory compliance etc.

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