Construction-Linked Plan: Why Choose with Caution

Drive across Noida or Gurgaon, the skyline is awash in shades of grey. Not grey clouds. But the grey of cement-plastered bare-shell buildings that stand abandoned for want of funds or as some buyers say, for lack of will. Home buyers have begun to claim that this racket of execution delays spread across NCR is actually perpetrated by misleading payment schemes. The most popular being the Construction Linked Plan (CLP). How, you ask? Let’s start with the basics first.

1. What is a Construction Linked Plan (CLP)?
Under the ‘Construction Linked Payment Plan’, the bank disburses instalments to the developer on your behalf for pre-decided construction milestones. Every time a certain level of slab is laid, the bank will release some percentage of the loan amount. These Construction-linked payment plans are tailored in such a way that by the time the last slab is laid, 95% of the unit’s price has been collected by the developer. The remaining 5% is demanded from the buyer when the developer offers possession of the unit. Only after the handover, will the buyer begin repaying the loan to the bank. His first EMI starts right after possession. However there is no relief as such for the home buyer. During the construction period of the loan, he is not just paying rent but also the Pre-EMI, which is the interest component of the loan.

2. CLP allows Cash Windfall for Developers?
The superstructure, which is the outer shell of a building, is the fastest and easiest part of the construction timeline. Usually within 12 months, the bare skeleton of an apartment building can be erected. And this amounts to just 25 to 30% of the project’s total cost. But every developer today collects almost 95% of the apartment’s cost till up to just the superstructure. Within one year he has collected a huge corpus of cheap, liquid cash that’s come to him not even in his name but in the buyers. So he has no liability as such. Raising this kind of money in today’s market through alternative sources is impossible for most due to high rates of interest. So while buyers assume the ‘Construction Linked Plan’ is helping them space out their payments, it is the builder who enjoys uninterrupted, assured, timely cash disbursals.

3. Developers run CLPs like a Ponzi scheme?
Home buyers have been claiming for long that there is no transparency and accountability in how developers utilise their instalments. There is no regulatory body to report to with their account books. There are no rules that define for what purposes the home buyer’s instalments can be used. Even the Modi Government’s version of the Draft Real Estate (Regulation and Development) Bill has replaced the provision of an escrow account with what it calls a ‘separate’ account. And they have brought down the mandatory reserve limit of funds from 70% to 50%. So in India, a developer is free to just erect the superstructure to serve as an eye wash to home buyers who want to see physical evidence of progress. And meanwhile he can divert the bulk of the funds towards buying new land assets or launching new real estate projects. In this new project he will hope to raise fresh money which in turn he will use to further his expansion plans.

4. Why do CLP-funded Projects get stalled?
This cycle gets disrupted when the market goes bust like it is today. Economic slowdown, high interest rates and several other factors can shrink sales. And if people are not buying homes, signing up for CLPs, how will fresh money be created? How will the developer keep his old projects running? How will he retain his contractors and labour for the new projects he has launched? How will he fund the internal-works of all the superstructures he has peppered all over the city? With his funding wheel punctured, he has no choice but to let his old projects where 95% of the money is in and superstructure ready to be indefinitely stalled.

5. Is there a better payment plan for me?
Representatives of various buyers groups say ‘Construction Linked Payment Plans’ must be redesigned. Structure the payments such that at least 40% of the price remains unpaid till after the superstructure. However all such schemes and plans are industry-driven practices and the buyer has little negotiating power to have it changed. The ‘Possession Linked Payment Plan’ or (PLP) on the other hand offers a more level playing field to the buyer. You pay 20 to 25% of the total cost on booking. And the balance is paid only after the possession is handed over. If the developer delays beyond the agreed period, you can invoke the penalty clause of your ‘Buyer’s Contract’ to seek damages. So the developer clearly has a lot at stake under a ‘Possession Linked Payment Plan’. However you must study the developer’s past records and must ascertain if he has all the mandatory approvals and clearances in place.

Vasudha Sharma, Anchor & Correspondent- The Property Show


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