You may have heard of these real estate jargons and often wondered what they actually mean. Here is a list of such technical words oft-used in real estate and what they mean. This is the second part of the series.
Infrastructure status: Grant of ‘infrastructure status’ to a sector leads to entitlement of various benefits and concessions, enabling the sector to get long-term credit at competitive rates. The Reserve Bank of India categorizes infrastructure lending for industry categories such as transport, energy, water and sanitation, communication and social and commercial infrastructure. Infrastructure status enhances the avenues to raise money from lenders such as insurance companies and pension funds on easier terms. It also provides easier norms for lending under the ‘priority sector’ for certain sectors such as housing, social infrastructure and small and medium enterprises. Falling under this category also helps the sector get access to cheaper foreign currency funding through the external commercial borrowing route. Within Indian real estate sector, affordable housing and the logistics sector (industrial parks, warehouses, cold storages) have been accorded infrastructure status.
Lease Rental Discounting (LRD): Lease Rental Discounting is a secured term loan offered by a bank or financial institution to a commercial property owner with rental receipts from lease contracts as collateral. The loan is provided to the lessor basis the discounted present value of rentals as well as the underlying property value. Typically, a bank or financial institution gives a loan of 70 – 80% of the property value which is also referred as the Loan to Value Ratio. The rent for the property is transferred directly to the lending institution as EMI instead of being paid to the owner. The security of the payment is derived from the lease rent while taking into account factors including the lease tenure, expiry of the lease.
Force majeure clause: Force majeure clause is a contractual clause that temporarily modifies obligations and/or liabilities of parties under a contract when an extraordinary event or circumstance beyond their control prevents one or all of them from fulfilling those obligations. The events covered under this clause cannot be anticipated or controlled and include acts of God, war, terrorism, earthquakes, hurricanes, acts of government, explosions, fire, epidemics. Force majeure envisages that if a contract is dependent on the happening of an event which becomes impossible, then the contract becomes void (unbinding) for the time that a force majeure event exists. The interpretation of an event is determined by the way a clause is entered in a contract. Example, COVID-19 will alter the obligations if the contract covers epidemics as an event.
Sales Comparison Approach: A real estate property appraisal method to assess the value of an asset/property by means of comparing it with other similar properties that may have been sold recently in the open market. In this method of value estimation, the property under consideration is compared with other properties having similar attributes such as age and current condition, location, accessibility and social and physical infrastructure among others. The market value of the said property is assessed with reference to the premium or limitation it has when attributes of both the properties are compared, and a premium or discount is accordingly accounted for on the price of the sold property.
Capitalization rate: Also known as the cap rate, it is a valuation metric used to evaluate a real estate investment. It shows the investment’s potential rate of return based on how much income the property is expected to generate in the future. Thus, a higher cap rate is deemed to be better for the investor. The cap rate is calculated by dividing the net operating income (rental income less the expenses of managing a property) by the property’s current market value. The metric does not take into account any debt on property or time value of money. The rate, which is also the opportunity cost of capital, is directly related to the risk. A low capitalization rate usually denotes a lower risk property, and a higher capitalization rate usually denotes a higher risk property, which usually brings a higher rate of return.
Data center rack: Frame within a data center facility used to keep cables, networking devices, servers and other computing equipment. The height of the rack determines its capacity to hold the networking equipment as well as provides an estimate of the power that can be transmitted to the equipment on the racks. Each rack might have different power requirement depending on the servers it holds, and installation of more powerful servers increases power consumption by the rack. Higher power consumption is also referred to as higher power density, which is the power drawn by a single rack populated completely with servers.
Dry powder: Amount of committed, but unallocated capital, raised by private equity funds from limited partners (LPs) such as pension funds, insurance companies, HNIs to be deployed in future investments, including in real estate. The capital is reserved for investment in real estate assets with attractive valuations and a potential to generate high returns, usually measured in terms of the Internal Rate of Return (IRR). This is a form of ready capital to deploy as and when lucrative investment opportunities arise but once the capital is committed for a specific real estate investment / segment, cannot be deployed in anything else.
Circle Rate: Also referred to as the Ready Reckoner Rate or the Guidance Value, this is the minimum price determined by state governments at which a property has to be registered in case of transfer. The circle rate indicates the property prices in a specific market with the buyer required to register the property at the circle rate or actual transaction value, whichever is higher. The rate varies from state to state and provides an important check against speculative activities in the real estate market. In case of property transactions where the actual transaction value is upto 10% (5% earlier) lower than the circle rate, the difference is taxed as ‘other income’ for the buyer. The seller will have to pay capital gains tax on circle rate in such cases. This revised provision is as per the Union Budget 2020 and to be effective from 1st April 2021. Tax relief has been provided on properties valued upto Rs 2 crores and being bought and sold at 20% below the circle rate in primary market (till June 2021), as per the latest COVID stimulus package.
Mixed-use development: A property development which blends together two or more revenue generating real estate classes such as commercial, residential, retail and hospitality. The development takes into account the design, compatibility and integration of different asset classes within the overall project. Mixed -use developments can be vertical or horizontal. The former combines different uses within the same building with retail businesses on the lower floors and residential units or office spaces on the upper floors. Under horizontal mixed-use development, two or more asset classes may be developed within a specific neighborhood or project.
Kiosk: A temporary, partially enclosed retail structure that is set up in commercial and business sites with heavy foot-traffic, especially in shopping malls and supermarkets. It is used for attracting more customers and for marketing and advertising purposes.
Business Continuity Plan (BCP): A manual which lays down a list of preventive and recovery measures to be adopted by an organization in times of unprecedented events that might cause threat to business. It acts as a checklist of processes and their implementation methods that are required to ensure continuity in business.
Coworking: An arrangement where employees of different organizations share a common office space and infrastructure provided by a 3rd party operator/service provider. Usage of this common workspace enables cost savings, convenience and leveraging of business opportunities through creation of a community platform. This segment is an extension of the conventional office segment with increasing influence over the latter. The shared space offered in a coworking set-up is usually fully serviced with a combination of dedicated and hot desks, private cabins leased out to various clients including start-ups, small businesses and large enterprises. Aesthetic office design and community engagement through social events are an integral part of coworking spaces.
Joint Venture: A business enterprise formed between two or more business entities or individuals through signing of a contractual agreement for the purpose of executing a business undertaking, wherein all the parties share the responsibility of the associated risks, costs, profits, and losses. Implementation of RERA has driven the rising trend of JVs in Indian real estate (prominently in residential segment) whereby smaller developers collaborate with larger, established developers with capital and operational expertise for executing projects.
Development Management Contract: A mutually beneficial agreement signed between a developer and a local or regional player/landowner for timely execution of a project. While the developer works on an asset light model with reduced financial risk along with an opportunity of geographical expansion, the landowner or local player enjoys the benefits of better brand credibility and improved construction standards. The business model is exercised through a Development Management fee, which is a percentage of revenue in case of residential properties and a percentage of cost in case of commercial properties.
Forward Purchase: A transaction where a buyer pays an advance to the seller at a negotiated price and signs an agreement to buy the latter’s property at a future date. The stakeholders get into this kind of arrangement mostly in case of an under-construction property where often the buyer’s advance payment is utilised in the development of the asset. Global private equity investors opt for forward purchase transactions in sectors or assets with better opportunities for higher returns.
Demised Premise: Space that is allocated by a lessor to a lessee for occupation during the tenure of lease, as laid down in the mutually agreed lease contract. The lessee can use this demarcated space and is made responsible for its maintenance, along with other shared spaces in the overall property. The term ‘demised’ refers to the unavailability of this space in the open market for that specified term period.
Lock-in: Lock-in in a lease agreement refers to the time period during which neither of the parties, lessor or lessee can terminate the agreement and offer it to other interested parties or exit the premise respectively. While in lock-in, the lessor assures a specified lease rental to the lessee, the latter is legally bound to occupy the space for the specified term period. Based on the terms of a lease agreement, if the lessee terminates the lease during the lock-in period, the lessee shall be liable to pay the lessor the residual rental for the unexpired period of the lock-in. Such amount may be adjusted from the security deposit paid.
Net Absorption: Refers to the net change in occupied space over a given period taking into consideration the occupancy or exiting of space by tenants/occupiers. The occupied space is arrived at by summing up the square footage of space newly leased minus the space exited by tenants during the specified time period. The difference in occupied real estate space between two time periods is referred to as the net absorption in a particular property.
Core and Core Plus Assets: Core assets refer to mature or stable income generating assets that ensure lower risks for the investment returns. Core plus assets are under-performing projects due to their lower income generation ability in comparison to the prevailing market conditions even though the occupancy rate is good. The value and income generation capacity of such assets can be enhanced through investment for upgradation. Their attractive valuation and ability to generate higher returns upon upgradation makes them compelling for long term investors to venture into.
Weighted average rent: An average rent calculated by factoring in, or weighting, the square footage of inventory or vacant space. Weighted average rental calculation allows certain rental values to contribute more or less than others depending on the associated weight.Check Real Estate Dictionary: Know what the jargons mean - Part 1