Distressed Property

What is a distressed property?

Although rare, a distressed property is one where the owner has borrowed against property to acquire the asset and has not been able to repay his debt obligations. If the borrower fails to service the loan for 4-5 consecutive cycles, the property is seized by the bank as collateral. The lender bank then sells the property to recover its outstanding interest and unpaid principal amount. Such a property is sold through a bank auction and can be acquired at prices which are often well below market value.

However, less than 5% of Indian borrowers default on repayment of a loan for periods long enough to permit a bank auction. Moreover, there is limited scope for getting such properties at throwaway prices, as the base price for the auction is determined by the loan amount outstanding which means that if the owner is far ahead in the loan term, the lower the base price. Hence, owners who have only a few cycles left to settle off dues would prefer to restructure the loan rather than default on payment.

Sale of distressed property – how to know?

As a custom, banks release an advertisement in leading local newspapers when they propose to auction off a property or set of properties. So, this is the best source of information. A bank’s annual report always mentions a provision for bad debts, and the schedules/annexure reflect if and when any distressed properties will be coming up for auction.

You can also contact a property consultant with expertise in the location and enquire about distressed asset opportunities in the area. The property advisor can also represent investors in discussions with the original owner or directly with the bank.
Sale of distressed property – the process

When a property is positioned for auction, it is advisable to read the bid document vigilantly to understand the status of unpaid dues. The bid document is like a prospectus of an IPO where all the facts pertaining to legal, title and responsibility for pending dues are outlined. Most of the time, the property is sold on a ‘as is where is’ basis and till the date of auction, loan obligations are cleared.

Between purchasing a distressed asset through a real estate advisor or local enquiry and bank auction, the latter is a lengthier process as the bank will first release an advertisement, set a date for the auction, invite bids, collate the offers and then finalize whom to sell the property. It becomes more cumbersome if the buyer himself plans to acquire the property on loan. The bank conducts a thorough due diligence search on the incoming buyer and then draws up contracts to transfer the property along with a go-ahead from the owner and a society NOC making the process even more time-consuming.
The bank has to obtain an NOC from the society before conducting the auction. Many societies and their members have first right of refusal along with the right to match the highest bid to buy property. The society highlights any liabilities that the new owner will have to bear. These aspects are captured in the bid document by the legal council of the bank and the bidder can refer to them to assess the exact liability.

When the distressed property is being directly purchased from the owner, both parties (original owner & new owner) agree on the commercial terms, exchange a token deposit and then complete the bank process to proceed with the purchase. The entire process of releasing the property by the bank, granting the NOC and procuring NOC from the society in addition to clearing off the bank dues may take nearly 2–3 months. The price in this case is therefore usually higher than it would be in a bank auction, since the seller tries his best to recover as much of his initial investment.
To conclude, any buyer who wishes to purchase a distressed property must be fully aware of what he is getting in to. Exercise precaution by carefully reading the bid documents, understanding the history of the property under discussion and also get historical papers for title due diligence to avoid any legal challenges in future.

BMC Property Tax payment

As per a new resolution of the BMC’s standing committee, property owners in Mumbai will have to pay an average increase of 14.52% as property tax from April this year. However, owners of flats that measure less than 500 sq ft will not pay the increase as they have been granted relief by the Chief Minister. Under the new rules, there will be no increase for this section for a period of 5 years; a  respite for around 17 lakh families living in houses which have less than 500 square feet of area.

For the information of our readers, The Brihanmumbai Municipal Corporation (BMC) has changed the property tax calculation from the earlier Rateable Value System (RVS) to the new Capital Value System (CVS).

So, how will the property tax be calculated now? Under the RVS, the tax was calculated based on the maximum amount of rent that the property could fetch in a year. The CVS is based on the market value of the property. Read on for clarifications on tax calculations and to know how to pay these taxes.

Calculation of Capital value:

Market value of property (X) total carpet area (X) weight for construction type (X) weight for age of building

The Ready Reckoner (RR) will help you arrive at the market value. RR is a compilation of the rates that denotes a fair value price for a property set by the state government. The builder may charge a premium over such rates however cannot under sell it. The RR gives the base value. Remember, the stamp duty and registration amount payable cannot be lower than these rates.

Check the ward / zone in which your property falls.

Weights for construction type are calculated in units. Refer below for details:

Bungalows & RCC construction 1 unit

Other than RCC (semi-permanent / chawls) -0 .60 unit

Under construction or vacant land 0.50 unit

Weights for age of building are calculated in units Refer below for details:

Properties constructed before 1945 0.80 unit

Properties constructed between 1945 and 1985 0.90 unit

Properties constructed after 1985 1 unit

Now, how is the property tax calculated?

Capital value of property (X) current property tax (X) weight for user category

A weight for user category is calculated in units. Refer below for details:

Hotels and similar businesses 4 units

Commercial properties (shops, offices) 3 units

Industries & factories 2 units

Residential & charitable institutions 1 unit

Where can you pay the property tax?

You can pay property tax at:

• The Office of the Assistant Revenue Officer
• the BMC Help Centres
• The Citizen Facilitation Centre at all the Ward Offices.

You can also make an online payment. Read on to note down the steps:

Log on to the BMC website:

http://cvs.mcgm.gov.in:7001/MCGM_CVS/

• Enter your account number mentioned in your property tax bill. In case you do not remember your account number, use the in-built search feature.
• Choose the option of payment: half-yearly or annually
• Enter the amount to be paid. You will be directed to the payment mode. Currently only ‘Net Banking’ service is available.
• After the payment is successful, the system will generate a receipt. Print it and store for your record.

Make sure that your record is updated and no ‘outstanding’ is shown against your account. In case of such amiss, the responsibility to get it rectified is on you.