What is land monetization?
Land Monetization is the process of converting undeveloped land into cash. For example, finding a buyer and completing a sale quickly. Land monetization is a complex and time-consuming process. Property owners need to take informed decision as it is mostly a sizeable transaction and involves multiple aspects to it. A property owner who wants to monetize their land needs to consider many factors and consult different types of consultants including property transaction manager, tax consultant and legal counsel during the transaction process.
Main considerations during land monetization
Based on our in-depth experience, property owners need to consider following aspects for successful and rewarding land transaction:
There are predominantly two models: outright sale or development partnership. Partnership can be classified into three types: Joint Development (JD), Joint Venture (JV) and Development Management (DM). If property owners seek immediate realization, then outright sale is a better option but if an owner intends to stay invested during the development cycle, then development partnerships is a better option.
2. Consult right consultants
It is highly recommended to consult market research, property transaction, legal counsel and tax consultant operating in this segment for a transaction of these nature. The consultants knowing the nuances of the transaction will be able to assist the owners in taking an informed decision as well as align the transaction as per prevailing norms.
3. Land documentation
It is property owners’ duty for both models to provide clear land title documents and different up to date revenue and survey documents without any encumbrance. Therefore, before taking the property for any discussion, it is recommended to avail all land documents. Availability of all the documents reduces the time taken to close the transaction, offers a better valuation, and reputed partners for the transaction.
It is important to know about the applicable regulations for the property including permissible use, permissible and achievable FSI, height restriction (if any) and other allied regulation. It helps the property owners to know the current and future potential of the property.
5. Market & Product
Macro and micro economic and market conditions have an impact on land transaction. It is advisable to know the status of property cycle of different permissible uses of the subject property. Property owners need to evaluate the highest and best use of the property to realize the optimum value of the property.
Market research will assist you what are the market benchmark transactions for similar properties. One needs to gather information for last one year on different sale transaction and partnership transactions to equip with market value of the subject property.
7. Partner’s reputation
It is important to engage with partners of clean financial records for outright sale. The source of fund is equally if not more important than property value. Sellers have faced numerous regulation issues post transaction when source of fund was unknown. For partnership, track record, financial capability, execution and sales capability, future growth plan and management are important factors to be evaluated.
8. Financial return
For outright sale transactions, we advise our clients for only payment of entire sale value at the time of property registration. However, if deferred payment is not avoidable, it is highly recommended to consult a good legal counsel and draft property sale documents with proper remedies to avoid hassles at later stage. For, partnership transaction, one needs to investigate different parameters, minimum sale value, sales velocity, shareable revenue/ profit, estimated timelines to estimate future cashflow for the property owners. It is highly recommended to consult an experienced property research and transaction firm for the same.
9. Taxation and Transaction documentation
Land transaction attracts Capital Gains Tax. The quantum varies based on holding period. One needs to consult a good tax adviser to plan this aspect. It is recommended to consult the tax consultant before starting the transaction process. Many people reach-out to tax consultant post transaction and end up paying more taxes.
For both types of land monetization: outright or partnership land transaction, property owners need to consult a legal counsel for verification of transaction documentation so that one avoids any unnecessary liability and protects his/ her rights. It is also advisable to share the final copy of the transaction document before signing with the tax consultant to protect from taxation perspective.
10. Post transaction: Asset Management
For partnership transactions, property owners should consider hiring a property and financial advisory firm for providing regular project status review report and reconcile accounting report. This will help to ensure the project is delivered as per signed transaction documentation.
Meraqi has assisted many property owners for land monetization transaction. We provide, market research, partner search, financial analysis, bid management and analysis, transaction document review and asset management services.