Your company has just finalised its first major real estate project. We explain how you can handle the financials from this point on.
The real estate market in India is currently in a state of flux, brought on by major developments like demonetisation in November 2016, followed by the promulgation of the GST in July 2017 and the establishment of RERA (Real Estate Regulation and Development) Act all over the country.
The need for greater transparency in the realty sector brought on developments like RERA, while the RERA was recently amended to include new clauses for developers transacting with buyers. Among these, an important clause was that developers would deposit 50% of the funds collected from home buyers in escrow accounts set up with leading banks within 15 days of receipt of the money.
Meanwhile, your realty firm has bagged its first major project – a township on the outskirts of the city. The land is privately held currently by a private party, and as the developer, you would develop the project and sell ready flats to buyers. This is your company’s biggest project till date, and efficient financial handling is essential from this point on. Now that the development agreement has been drawn up and registered, it is time to set up an escrow account.
What is an escrow account?
An escrow bank account is a temporary account created when two or more parties wish to transact with each other. However, the account is held by a third party, i.e. the bank, which operates the account till the time that the transaction is fully complete. The transaction is said to be complete only when all terms and conditions mutually agreed upon by the buyer and seller are met. Normally, the bank does not allow withdrawals by either party from the escrow bank account till the project completion.
* The money from the escrow account is transferred to your bank account only when you complete the project in full, and when the seller ratifies the project completion in writing.
* The bank may release partial funds to you in the event that you require funding to keep the project going as per schedule. However, you may have to give a written undertaking to this effect.
* You must also obtain an NOC from the bank and the seller to commence the project, and give project timelines in writing to both.
* Do ensure that your firm has enough working capital to keep the business running smoothly while the project is underway. There are severe penalties for delaying the project due to lack of capital, and you may withdraw only one portion of the money in the escrow bank account.
* Once the project is completed and handed over, you may apply for a release of the funds from the escrow account to your company account.