Essential market practice in India:
Standard unit of measurement
Unit of measurement: Square feet is the standard in most markets.
Quotation Of Floor Area: Commercial premises throughout India are measured on three different bases. The convention is for all premises to be leased relative to their Built up area. However as values have risen, some developers are now equating lettable area in super built terms in reduce the effective psf rate.
Carpet Area: The total internal area of the premise measured from internal walls.
Built Up Area: The total area of the premises measured from the central perimeter will surface and incorporates an allocation of common areas on the same floor excluding lift core and the stairs. This is usually 20-25% larger than carpet area.
Super Built Up Area: It incorporates the built up area and a proportional allocation of all common areas including stairs, lift cores, ground floor lobby, and caretaker's office/flat throughout the building. This usually represents an increase of 35-40% over above the carpet area.
Operating Costs: Rents-In most Indian metros, the quoted is net of management fees and other outgoings. Rents are quoted in rupees per square feet per calendar month. All figures are quoted utilized the Indian numbering system of tens, hundreds, thousands, hundreds of thousands (Lakhs) and ten millions (Crores). 1 Crore = 10,000,000. 1 Lakh = 100,000.
The method of payment varies from city to city. Usually it is a minimum of 12 months rent in advance, which is adjustable during the lease period. Thereafter the rent is payable in advance on a monthly or quarterly basis.
Management Fees: All corporative society costs, which include an allocation of cleaning, security, electricity and water charges for all common areas and non-occupancy charges, have traditionally been borne by the landlord. However there is an increasing trend for these to be negotiated.
Utilities: The tenant is usually responsible for electricity, water and telecommunications charges consumed in the individual premises.
Insurance: The landlord is responsible for the building's insurance and the cost is included in the calculation of the tenant's monthly rent.
Car Parking: In the majority of Indians metros, there is an acute shortage of both open and covered parking, parking (where available) is charged as an additional cost with charges varying significantly.
Government Rates - All government dues and fees applicable to the specific property are paid by the landlord and included in the rent payable by the tenant. The tenant is not liable to pay such charges directly.
Tax: Municipal taxes have been traditionally borne by the landlord. However there is an increasing trend for these to be negotiated.
Lease Period: Normal commercial lease terms are for 3+3+3 years, renewable every 3 years and leave and license are for 5 years. For large space commitments, longer-term leases can be negotiated for a minimum of 9 years.
Normal residential leases are for a period of 11 months.
Rent Reviews: Most Indian landlords will have no objection to an option term for a period equivalent to the initial term.
It is normal for rent and security deposit either or be reviewed on mutually acceptable term in line with market norms on exercising the option or to a fixed increment.
Subletting and Assignment: There are usually blanket restrictions on a tenant subletting or assigning. In certain limited cases, tenants can secure permission to sublet to an associate company.However this needs to be negotiated at the time of the initial agreement.
Early Termination: Normally allowed with a termination notice period of 3-6 months. Termination is not possible without the notice period unless it is agreed between the landlord and the tenant.
Dilapidation (reinstatement): The Reinstatment clause is generally included in the lease terms as a condition for termination of lease and exit of the tenant.
Hours of Operation: Normally maintenance charges are computed for an 8-12 hour period beginning from 8am.The tenant must pay an additional fee for usage of common areas and services like power backup and HVAC outside of the normal daytime usage.
Agency Fees: Up to 2 months of base rent paid by the tenant, in addition to 2% of the interest free security deposit.Payable by the tenant or landlord.
Legal Fees: All legal fees for due diligence and ratification are borne by the tenant.
Security Deposit: Normal practice to charge an equivalant of 3-12 months rent as the interest free security deposit depending on different markets.
Land Title: Both freehold and leasehold land is available in major cities. In the case of leasehold, the tenure is from 99 to 999 years.The leasehold land is transferable through general power of attorney.There is however often multiple ownership of a single plot of land and hence problems in transferring ownership of land.
Foreign Ownership: Foreign company and Foreign national are required to obtain permission of the Reserve Bank Of India (RBI) to acquire,hold,transfer or dispose of in any manner (except by way of lease for a period not exceeding 5 years) any immovable property in India.The RBI has granted special permission to foreign companies(other than banking compnies)that are not incorporated under any law in india, to acquire or hold immovable property that is necessary for them to carry out their business in india.
Foreign citizen and foreign companies are permitted to acquire residential property in india upon specific application to the RBI provided that are consideration for purchase is met out of foreign exchange remitted from abroad in any converitable currency through normal banking channel. The recent relaxation of restrictions on foreign investments in commercial property is expected to result in an increased level of overseas investment in indian real estate and provide corporate with more ownership options during 2005
Strata Title (Partial Ownership Of The Building): Apartments and offices are sold on the basis that strata titles will be granted to the purchaser in due course which gives security to the purchasers. A management association may then be formed to manage the common areas of the building.
Agency Fees: Up to 2.5% of the sale/puchase value of the property. Legal Fees-Ranging from US $ 50-75 per hour.
Stamp Duty: Stamp duty and registration charges very between 8% and 14% across different states in India.
Real Estate Definitions
Base Rent: The initial rent that must be paid under the lease contract is usually a specified dollar/rupee amount, which we refer to as the base rent.
Base Year: The year of a lease term which is used to compare subsequent years; used when calculating operating expense pass-through expenses.
CPI (Adjustment): Consumer Price Index. The CPI measures the price paid by consumers for a fixed group of goods and services. Changes in the CPI over time constitute a common measure of inflation to adjust pricing and in the case of real estate either rent or expenses.
CAM: This is the amount of Additional Rent charged to the tenant, in addition to the Base Rent, to maintain the common areas of the property shared by the tenants and from which all tenants benefit. Examples include: snow removal, outdoor lighting, parking lot sweeping, insurance, property taxes, etc. Most often, this does not include any capital improvements (see "Capital Expenses") that are made to the property. This is a retail concept, for office we usually see this as a component of operating expenses, but it does not include taxes, insurance, utilities, or janitorial.
Commencement Date: The date that rental payments due on a lease begin.
Concession: Lease contracts may include concessions that effectively lower the rental rate. One example of a concession is "free rent period".
Discount Rate: This accounts for the time value of money and arises naturally in financial models, such as a portfolio selection problem. A discount rate of 7% means $1 earned a year from now has a present value of approximately $93.46 (1/1.07). If $1 is earned n years from now, and the discount rate is r, the present value is $1/(1+r)^n.
Expense Stop: An agreed dollar amount of taxes and operating expense (expressed for the building as a whole or on a square foot basis) over which the tenant will pay its prorated share of increases. Typically, the expense stop (base stop) is the actual taxes and operating expense for the base year of the lease.
FSG (Full Service Gross lease): An all-inclusive rental rate that includes operating expenses and real estate taxes for the first year. The tenant is still responsible for any increase in operating expenses over the base year amount and parking and after-hours HVAC and Back up power.
Lessee/Tenant: The one holding the rights of possession and use of property under the terms of a lease for set rental payments. The lessee (tenant) is the person/entity to whom the lease is granted
TERMS - REAL ESTATE LEASES
Lessor/Landlord: One who rents property to another. In the case of real estate, the lessor is also known as the landlord.
Lease: An agreement whereby the owner of real property (i.e., landlord/lessor) gives the right of possession to another (i.e., tenant/lessee) for a specified period of time (i.e., term) and for a specified consideration (i.e., rent).
Load Factor: A load factor is a measure of efficiency. The load factor is calculated as: = High load factors generally indicate a large number of common areas and therefore lower "building efficiency" Or a small floor-plate.
Market Rent: The rental income that a property would command on the open market with a landlord and a tenant ready and willing to consummate a lease in the ordinary course of business; indicated by the rents that landlords were willing to accept and tenants were willing to pay in recent lease transactions for comparable space.
MG (Modified Gross lease): A lease where some of the expenses of owning and operating the building are passed through directly to the tenants. Examples of modified gross leases include leases where the landlord pays all operating expenses except for certain items such as utilities, parking, or janitorial expenses. A modified gross lease can be thought of as a hybrid between a NNN lease and a FSG lease.
NNN (triple net or net lease): A lease in which there is a provision for the tenant to pay, in addition to rent, certain costs associated with the operation of the property. These costs may include property taxes, insurance, repairs, utilities, and maintenance.
Occupancy Date: This is the date that the tenant can move into lease premises. This can be earlier or later than the commencement date. However, typically this is earlier.
Pass-Thru: Refers to the tenant's pro rata share of operating expenses (i.e. taxes, utilities, repairs) paid in addition to the base rent. In a FSG lease this would be the difference in the actual operating expenses and taxes for the current year versus the base year.
Rentable Square Footage (RSF): Denotes the number of square feet in a commercial building deemed for rent, according to BOMA. May include common area load factor or allowance for building amenities such as hallways and lavatories. It is the Usable Square Footage plus the tenant's pro-rata share of common floor area.
Rent Premium & Rent Discounts: All rents are a function of location, age, quality and condition of the premises. Examples of premiums would be: ground floor, top floors with unobstructed views, building corners. Examples of discounts would be: middle floors, areas not adjacent to the elevator bank, obstructed views.
Signage: Purpose to grant one or more tenants the right to display a name inside and/or outside fo the building for an additional fee (may be waived in some cases via negotiation)
Annual Increases/Rent Increases: A lease specifying set increases in rent at set intervals during the term of the lease.
Sublease: A lease transaction in which the use of leased property is released by the lessee to a third party, usually while the lease agreement between the original parties remains in force.
Sub-lessee: The tenant under a sublease who has subleased from someone who in turn is a lessee (tenant) of the owner of the property.
Sub-lessor: A lessee (tenant) who leases part of his or her interest to a third party (sub-lessee) but retains some interest in the property.
Term: The length of a lease usually provide for in years or months.
Tenant Improvement: Improvements made to the leased premises by or for a tenant. Generally, especially in new space, part of the negotiations will include in some detail the improvements to be made in the leased premises by the landlord. Landlords will in many cases grant a fixed dollar allowance to a tenant to make the space usable for their purposes. Any costs above this allowance are then the responsibility of the tenant.
Usable Square Footage (USF): Usable Square Footage is the area contained within the demising walls of the tenant space.