This article was authored by Apoorva Mandhani.

The Central Government had, in 2015, launched the Smart City Mission, vowing to develop 100 cities across the country, making them citizen-friendly and sustainable. These cities, with landscaping and amenities straight out of a sci-fi movie, envisage to use the internet of things (IoT), data, and technology to streamline services for more connected, efficient, manageable, and cost-effective communities.

With this mission having completed three years, quite a few such cities have made news for implementing innovative technology led projects like City Command and Control Center, smart parking, city surveillance, intelligent traffic management etc. Let us find out what these projects have in store for real estate lawyers!

Will due diligence survive?

One of the foremost steps for putting through a real estate deal is due diligence. It requires clearing the title of a property from any encumbrances, and hence, involves examination of documents transferring title for at least the last 35 to 40 years.

The catch is that these documents are more often than not, incomplete or even missing at times. A revenue search in the government records is the next best bet, albeit a dicey one. This is what makes the entire exercise of conducting a title search both dreadful and lucrative—dreadful because of the current condition of government records and lucrative because of the money that can hence be charged for undertaking such search.

However, one of the first steps before setting up smart cities is expected to be the digitization of government records to ease the process of land acquisition and development. The present value attributed to due diligence might, therefore, go down, simply because it is believed that the process is going to get a lot easier. However, there is good news as well:

Regulation clearances will thrive

While the need for due diligence work may go down, it is expected that the need for lawyers to help with the varied regulations to be put in place would go up. This is especially necessary because, in lack of such approvals and clearances, the project could be tied up in legal troubles for years before it finally starts generating returns on the humongous investments that go into it.

Take for example the experience with Andhra Pradesh government’s plan to build Amaravati, a “greenfield” capital city where four million people would eventually reside. The project envisages a spectacular 32-kilometre long riverfront along the verdant banks of the Krishna between Guntur and Vijayawada. It hopes to house two international airports and to become an attraction for Buddhist tourists.

However, several farmers and civil society activists have since alleged that several environmental and land acquisition norms have been violated in the progress of the project. For instance, it has been claimed that the Andhra Pradesh government has violated rules while acquiring fertile agricultural land and wetlands – nearly 40% of the total area of 33,000 acres – where some 100 varieties of grains, vegetables and fruits are cultivated. With such allegations already surfacing, it is likely that the project is going to be entangled in litigation for a while, putting investor’s money in great risk; probably discouraging future investments in such projects.

Therefore, this tells a precautionary tale, one that should be in the rule-book in the “don’ts” section. For a smart city to be sustainable in all aspects, blemish-proof environmental and other clearances will have to be put in place. This, of course, would require lawyers to step in and take charge, helping builders and financiers with such clearances, presenting another lucrative opportunity for lawyers to grab.

Project Finance

As for the source of financing, most of the smart city plans require 70 per cent of the total outlay to be funded by the Central and State Government, either through the Smart City Mission or through convergence schemes like AMRUT, Swachh Bharat etc. The remaining 30 per cent is required to be funded by the private sector, either through public-private partnership (PPP) projects or through the issue of municipal bonds / similar instruments.

PPP projects

For utilisation of PPP projects, there would a need to significantly scale up the number and size of such projects for them to be able to mobilize target private investments. This would require project finance experts at every stage, especially because of the change in the character of employing large-scale PPPs, which would now have to be implemented in the brownfield development category—an unexplored combination in the country. For the uninitiated, the fact that smart cities emanate from existing cities makes these brownfield projects, as against greenfield development, which comes up on unused lands.

In other words, large-scale PPPs have so far been limited to projects involving the construction of urban commercial infrastructure, with the Government contributing the land. However, in contrast, the government now holds the fragmented portion of land pieces in most smart city projects, requiring scaling of the PPPs.

Municipal bonds

As for the issuance of municipal bonds and similar instruments, very few cities have actually gone ahead with issuing bonds, as most smart cities could not secure investment grade rating in the credit rating exercise conducted as a precursor to bond issuance. The major reasons for sub-investment grade ratings have been attributed to issues relating to financial sustainability. This is because it is difficult to cover the cost of service delivery as user charges for key municipal services like water supply and solid waste management are inadequate.

However, this might become viable with revised policies and regulatory and institutional frameworks. The bottom line here is that the financing of smart cities is still evolving, and hence, project finance teams for such cities can expect to have a steady inflow of work over the years.

Drawing up of contracts

Lawyers would be required to render their assistance in the drafting of intricate contracts that would come up in the course of these financing options as well as construction phase. They would be needed to draw out hundreds of types of different contracts and negotiate.

For instance, the level of risk borne by a private partner in the entire set-up largely depends on the type of contract. So while in a management contract, the private party shares minimal risks with the public sector, in a lease contract, private parties take on operating and collection risks. As against these, Build-Operate-Transfer (BOT) and Rehabilitate-Operate-Transfer (ROT) contract, private partners also take on investment and financing risks.

There would also be thousands of vendor contracts, service contracts etc.

Land acquisition litigation

NITI Aayog’s new strategy paper states the economic direction this government would take if it returns to power in 2019. For land acquisition, it states that it would make Bhumi Rashi, a web-based portal to bring transparency in land acquisition for road projects, functional by March 2019. It further states that it would sensitise stakeholders on the procedures to determine the market rate, decide compensation and disbursement.

However, it largely fails to address the persistent issues pertaining to use of force, and inadequate compensation, resettlement and rehabilitation, as well as the issue of people not getting money in their banks. With no new vision on this aspect of constructing smart cities, it is likely that litigation relating to land acquisition is here to stay.

Project management

What also needs to be understood is that while it has been three years since the announcement of the government’s plans, the project is still very much a work in progress. Out of the 99 selected cities, 20 were declared in January 2016 and the last 9 were declared only this year in January.

Further, unlike any other real estate project, the sheer scale of these smart cities make it necessary to have project management consultants conversant with the laws of the land, as well as setting up of Special Purpose Vehicles (SPVs). According to experts, both of these could take anywhere between 15 to 18 months to put in place. Thereafter, a project needs to be picked, which would be taken up by the SPV in consultation with stakeholders, and then, cutting-edge technology would be required to finally implement this project. This would, therefore, require the long-term engagement of project management officials.

“PropTech” lawyers

Besides, the advent of smart cities could also lead to an onslaught of enhanced coordination between real estate and technology lawyers, to tackle the new legal challenges that these smart cities would pose. Take the cue from the pushback received by Google’s Quayside smart city in Toronto, on the issue of information privacy.

The concerns raised by the citizens, in fact, led to the formulation of a more government-friendly agreement between the government of Toronto and Google entity, “Sidewalk Labs”. Significantly, while the first agreement was largely silent on issues of privacy and data governance, the second one stated that the project will move forward under “the most privacy protected/citizen-centred set of policies and governance structures in the world, recognizing privacy as a fundamental human right.”

Anyway, this does present a rosy picture for lawyers, with several new avenues opening up to them with the development of smart cities. If you want to know more about this, you could explore this online course on real estate laws. This course will familiarise you with the corporate and legal structure used by the government for smart city development, and a whole lot more than you need to learn to capitalise on this sector, within a span of three months.

You can also do a course on contract drafting as this is definitely a skill that will be high in demand.  You will not regret if you learn M&A, institutional finance and investment law course either. Our courses will equip you to systematically learn the most essential skills to deal with the upcoming legal challenges that the economic changes are bringing forth to the legal and business world.