A Project Report on Kalpataru

8/9/2019 A Project Report on Kalpataru

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Registration No: 107-1121-0064-13


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2KALPATARU LIMITED

A PROJECT REPORT ON

Brand awareness & Channel partners management for Real Estate Sector

WITH REFERECE T! "alpatar# Real Estate$ %%B'I

Submitted in partial fulfillment of the requirements of the

%'STERS I BSIESS '(%IISTR'TI!

By

')' R!) CH!W(HR)

Under the guidance of

Bharat *erma

'SSIST'T %''+ER,S'-ES

"'-.'T'R -I%ITE(

INDIAN INSTITUTE OF SOCIAL WELFARE AND BUSINESS

MANAGEMENT

Indian Institute of Soia! We!fa"e and Business Mana#e$ent% Ko!&ata


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'KALPATARU LIMITED


Ro(an )aid*a

Mana#e"+,R


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-KALPATARU LIMITED

Sr no. Content Page

1 Stuent !e"#aration $

2 A"%noege'ent 6

3 E(e"uti)e Su''ar* 7

4 Co'+an* Pro,#e

$ eaers/i+ Tea' 11

6 rou+ Co'+anies 12

7 nno)ations 14

CSR 1$

A&ars in 2012-13 16

10 Rea# Estate 17

11 nternationa# Rea# Estate 1

12 Rea# Estate ro%er 2$

13 Rea# Estate A++raisa# 31

14 Rea# Estate Trens 3

1$ Rea# Estate E"ono'i"s 42

16 Rea# Estate #oa# usiness

s"enario

$1

17 Rea# Estate se"tor in nia $2

1 5o& rea# is t/e /*+e $6

1 SOT o8 rea# estate se"tor in

%o#%ata

$

20 Prou"ts o9ere * a#+ataru 60

21 o#%ata 'a+ 64

22 Pro;e"t O)er)ie& 6$

23 et/o 1

2 Sa'+#ing 'et/o 2

2


5/98

.KALPATARU LIMITED

ST(ET (EC-'R'TI!

I hereby declare that this project entitled Brand awareness & Channel partners

management for Real Estate Sector submitted in partial fulfillment for the award

of MBA is record of independent research work carried out by me under the

guidance of %r/ BH'R'T *ER%'$ 'SSIST'T %''+ER,S'-ES$

"'-.'T'R -I%ITE($ 010 "'-.'T'R STER+) S'T'CR2 3E4

%%B'I,511166.

I also declare that this project is a result of my own effort and has not been

submitted earlier for the award of any degreediplomaassociate shippri!e by any

other institutioncollege.

.-'CE7 "!-"'T' ')' R!) CH!W(HR)

('TE7 08th9#l:$;105 R!-- !701


6/98

/KALPATARU LIMITED

'C"!W-E(+E%ET

I would like to e"press my sincere gratitude to all those who ha#e been

instrumental in presentation of this project report. $o work can be

accomplished alone. It needs #arious people to gi#e a final stage.

I would like to thank #ery sincerely to (r/ S#mat? Ra: 3%B',(')4

IIS%BM for gi#ing her #aluable guidance to carry my project in a bestway and gi#ing much needed support and full cooperation for my report.

I am indebted to my project guide& %r/ Bharat *erma 3'ss?stant

%anager,Sales4'alpataru (imited& who has guided me for the successful

completion of the project.

.-'CE7 "!-"'T' ':an Ro: Chowdh#r:

('TE7 08th@#l:$;105 R!-- !/01


7/98

0KALPATARU LIMITED

EAECTI*E S%%'R)

.R!9ECT TIT-E7 Brand awareness & Channel partners management for Real

Estate Sector

C!%.')7 'alpataru )eal *state&Mumbai

.R!(CT7 -##r: < star apartments ?n

Bandra$'ana$9#h# and -onala w?th t?cDet s?e ar:?ng from cr to

;1cr/

I ha#e successfully completed my + months internship at ,'alpataru (imited- for the assigned

project titled ,-.Brand awareness & Channel partners management for Real Estate

Sector

Bharat *erma& Assistant Managersales& was my project guider who guided me how to carry

on with the project.

0/ .#rpose of the st#d:7

The ma?n oG@ect?e of the st#d: was to create a channel partner networD thro#gho#t"olData/

/his project is also e"pected to accomplish following task0. 1reate a better understanding of 1ompetitor2s work in 'olkata.

+. 1reate a perception about channel partners in 'olkata.

3. 1reate a database of channel partners willing to work with 'alpataru and ha#e probable customers in

Mumbai4une.

5. 1reate a better understanding about the real estate sector in the eastern part of the country6. 1reate awareness about 'alpataru among channel partners

In our project we ha#e been assigned particular areas in 'olkata. %e had to go and #isit

1ompetitors to create a better understanding about 'olkata real estate sector. Bengal

Ambuja&Unitech&Merlin&*mami&7(8&*maar M98&9odrej are few of the big guns already

working in 'olkata. %e had to create a perception about which section of the crowd they

are targeting more in 'olkata region& which kind of amenities they are pro#iding and

which price segment are they targeting.



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1KALPATARU LIMITED

4er sq ft. price of the total area and carpet area is one of the many important aspects of

the competitor study.

After competitor study we had to #isit channel partners throughout 'olkata :pre decided

locations; to create a better awareness about kalpataru real estate and also try to

understand the real estate sector scenario in 'olkata./he main purpose of the study howe#er was to understand whether those channel

partners ha#e any prospecti#e customers in Mumbai. 1ustomers who will be willing to

in#est in ongoing kalpataru projects.

7espite taking a suburban region where it is difficult to find organi!ed channel partners I

met a total of competitors during my internship.



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KALPATARU LIMITED

COMPAN3 PROFILE

Kalpataru Group was established in 1969 by chairman Mr. Mofatraj P.Munot. Kalpataru

Limited, the flaship real estate company of the Kalpataru Group of companies, is one of

the leadin real estate de!elopment roups in "ndia. #he focus has been on the

de!elopment of premium residential, commercial, retail, interated townships, lifestyle

ated communities and rede!elopment projects primarily in the Mumbai Metropolitan

$eion %MM$& ' Pune. #he Group is also underta(in projects in other (ey cities such as

)aipur, *urat, +yderabad and hennai.

#he Kalpataru Group has interests in real estate de!elopment, property and projectmanaement, enineerin, procurement and construction %-P& contractin for power

transmission and infrastructure projects includin road projects, warehousin and

loistics.

#he Group was one of the larest i!il ontractin firms in the Middle -ast, based in

/-, between 190 and 1923, and has completed !arious successful projects includin

residential properties, commercial, reliious establishments and other projects. 4rom

constructin inno!ati!e buildins to de!elopin

futuristic infrastructure, Kalpataru Group has de!eloped more than 25 landmar(s till

date.



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45KALPATARU LIMITED

Vision & Value

Vision

"To be a brand that is admired as an industry leader for its thoughtfully

designed high quality innovative life spaces, is recognized for its customer and

people practices and is acknowledged for fostering long term relationship withstakeholders"

Values

Business thics

!uality

rudence

#umility

$espect

ride

C/air'an@s >essage

hat had started as a !ision to be a brand that is admired as an industry leader is now a

reality with Kalpataru Limited. #oday we are reconised for !arious landmar(s across the

lenth and breadth of Mumbai. 7!er the last four decades, Kalpataru Limited has

de!eloped a stron foothold across Mumbai Metropolitan $eion ' Pune and is well8

(nown for its thouhtfully desined ' hih uality inno!ati!e life spaces.



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44KALPATARU LIMITED

e are proud to be amonst the foundin members of the "ndian Green :uildin

ouncil, which is acti!ely in!ol!ed in promotin the reen buildin concept in "ndia with

a !ision to ser!e as a sinle point solutions pro!ider and facilitator for reen buildinacti!ities in "ndia. ith business ethics, uality, prudence, humility, respect, pride at the

forefront, we are happy to be reconi;ed for our customer practices and ac(nowleded

for fosterin lon term relationships with sta(eholders.

eaers/i+ Tea'

>r. >o8atra; P. >unothairman, Kalpataru Group

Mr. Mofatraj Munot is the 4ounder, Promoter and hairman of the $s. 6,r. Parag >. >unotManain >irector, Kalpataru Limited

Mr. Para Munot is the Manain >irector of Kalpataru Limited, the flaship real estate

company of Kalpataru Group.



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42KALPATARU LIMITED

>r. Anu; >unot>irector, Kalpataru Limited

rou+ Co'+anies

Ka!6ata"u Po7e" T"ans$ission Ltd8

Kalpataru Power #ransmission Limited is a Leadin #urn(ey Player in power

%transmission 8 "ndia and o!erseas ? eneration ? distribution ? construction&,

infrastructure %oil ' as sector ? railways ? buildin ' factories ? roads ' brides& and

asset creation %transmission system ? roads ? loistics ' warehouse&, with a presence

across "ndia and in more than


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4'KALPATARU LIMITED

9MC P"o:ets ;India< Ltd8

)M Projects %"ndia& Ltd. is a leadin contractin company underta(in ci!il ' structural

wor( for commercial ' residential buildins, industrial, infrastructure and power plant

projects at !arious locations in "ndia.

4ounded in 1923, )M Projects %"ndia& Ltd is one of the leadin ci!il contractin

companies in "ndia. "t has a stron wor(force of professionally ualified construction

manaers, enineers and super!isors bac(ed by latest construction euipmentBs '

technoloically ad!anced wor( en!ironment. #he companyBs strenth has been its

commitment to the timely completion of projects with due emphasis on project

manaement, uality ' safety. /rmed with the technical e@pertise ained throuh a

!aried rane of e@ecuted projects, it can ta(e up any challenin and fast trac( project.

#he corporate office for )M projects %"ndia& is located in /hmadabad with other reional

offices at :analore, >elhi, +yderabad, Kol(ata, Mumbai and $aipur.

ith a pro!en trac( record of completin prestiious projects within the scheduled time

and uality parameters to the customerBs satisfaction, it is one of the few construction

companies certified under "*7 9551A3552 uality system "*7 1555A 355

-n!ironmental Manaement and :* 7+*/* 12551A3550 7ccupational +ealth ' *afety.

Lin( to websiteA www.jmcprojects.com

P"o6e"t* So!utions India P=t8 Ltd8

Property *olutions "ndia P!t. Ltd. %P*"PL& was established in 3555. "t is one of the

"ndiaBs larest indienous companies in Project Manaement ' >e!elopment %PM>*& and

"nterated 4acility Manaement *er!ices %"4M*&.

/t P*"PL, a lare pool of intellectual resources alon with incisi!e industry e@pertiseensures that the reuirements of clients from di!erse sectors li(e "#8"#-*, :P7?KP7, real

estate, :4*", healthcare, pharmaceutical, retail, education, residential, manufacturin

and media are met. /pplyin an interated approach, it pro!ides end8to8end, !alue

added ser!ices with a constant endea!or to mo!e up the !alue chain.

http://www.jmcprojects.com/http://www.jmcprojects.com/


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4-KALPATARU LIMITED

P*"PL has ambitiously !entured and added industrial and institutional food and caterin

to its portfolio of ser!ices. "ts uncompromisin approach towards uality has been

reconised and ac(nowleded by its clients. #he "*7 9551A3552 and 7+*/*

12551A3550 certifications are a testament to the companyCs uest for uality and safety.

Lin( to websiteA www.psipl.co.in

S("ee S(u>(a$ Lo#istis Li$ited

*hree *hubham Loistics Limited %**LL& an "*7 9551 ' 33555 ertified ompany is a

subsidiary of Kalpataru Power #ransmission Limited %KP#L&. **LL was created to ser!e

the needs of ari8commodity storae sector with the best practices and infrastructure in

ambient and temperature controlled warehouses across major mar(ets in "ndia.

ith a pan "ndia presence, it offers end8to8end loistics solutions to all commodity

sta(eholders and pro!ides ser!ices encompassin storae ' preser!ation, commodity

fundin, collateral manaement, testin 'certification, fumiation ' pest manaement,

commodity procurement, tradin ' e@ports and branded commodities. **LL has

de!eloped 13 state8of8the8art /ri8Loistics Par(s %/LPs& in $ajasthan ' Gujarat in the

first phase. #he second phase will be spread across Madhya Pradesh, Maharashtra '

*outh "ndia.

Lin( to websiteA www.ssll.in

http://www.psipl.co.in/http://www.ssll.in/http://www.psipl.co.in/http://www.ssll.in/


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4.KALPATARU LIMITED

nno)ations

Ka!6ata"u S?ua"e at And(e"i

/siaBs 1stand the worldBs 6th buildin to et Platinum Le!el ertification L--> 8 ore '

*hell by * Green :uildin ouncil.

Ka!6ata"u ,o"i@on at Wo"!i

1stresidential floor starts at the 1th le!el so that e!ery flat ets a sea !iew.

Ka!6ata"u ,a>itat at Pa"e!

#he cityBs first address to ha!e an independent car par( buildin and sports facilities li(e

olf puttin reen, bas(etball court ' a tennis court atop it .

Ka!6ata"u S*ne"#* at Santa"u@ ;Ee!ie=ed in #i=in#

>a& to t(e o$$unit* and ao"din#!* (as >een

onsistent!* dediatin# "esou"es to do its 6a"t fo" t(e

7e!fa"e of t(e 6eo6!e8 Be!o7 a"e !isted so$e of ou"

o"6o"ate+soia! "es6onsi>i!it* initiati=es8

#he Munot 4oundation, a public charitable trust, created by the hairman, Mr.

Mofatraj Munot in *eptember 1922 is instrumental in carryin out social and charitablewor(. nder the 4oundationBs auspices, numerous acts of charity ha!e been carried out.

#he Munot 4oundation has been oranisin reular 7steopathy amps at Kalpataru*ynery in Mumbai.

Kalpataru underta(es reular dri!es in!ol!in beautification and maintenance of

city roads and traffic islands to impro!e the cityscape throuhout the city.7ne of our projects D Kalpataru +eihts recei!ed the E:est "lluminated :uildinE

award as part of the ity :eautifyin >ri!e. #his dri!e was oranised by an FG7.e ha!e Mobile rches, oranised by an FG7, at a number of our sites. #hese

Mobile rches ta(e care of the construction wor(ersB children and educate them whiletheir parents are at wor( at the site.

Kalpataru pro!ides educational infrastructure and te@tboo(s and noteboo(s for

needy students. #his is our way of tryin to help impro!e the standard of li!in amonthe less pri!ileed and i!e them a chance for a better tomorrow. e also help pro!idemeans of li!elihood to the widows and senior citi;ens of our society.

e set up an electric substation to ser!e the towns of Fa(shatrana and Khedoi in

Gujarat after the 3551 earthua(e.e established a drin(in water system for the city of Pipar and its surroundin

areas in $ajasthan 8 a reion that has suffered from chronic drouhts.e oranised a 4ree Mobile *urical and -ye amp for the citi;ens of Pipar and its

neihbourin cities. #his camp was conducted for ten days, with a record of H doctors.e successfully treated appro@imately 9555 people at this camp.



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41KALPATARU LIMITED

254'+2542AWARDS

est in S/o& @esite


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4KALPATARU LIMITED

Real estateis "property consisting of land and the buildings on it, along with its natural resources

such as crops, minerals, or water; immovable property of this nature; an interest vested in this (also)

an item of real property; (more generally) buildings or housing in general. Also: the business of real

estate; the profession of buying, selling, or renting land, buildings or housing."

It is a legalterm used in urisdictions such as the !nited tates, !nited

#ingdom, $anada, %igeria,Australia, and %ew &ealand.

Residential real estate

'he legal arrangement for the right to occupy a dwelling in some countries is nown as the housing

tenure. 'ypes of housing tenure include owner occupancy, tenancy, housing

cooperative, condominiums(individually parceled properties in a single building), public housing,

suatting, and cohousing. 'he occupants of a residence constitute a household.

*esidences can be classified by, if, and how they are connected to neighboring residences and land.

+ifferent types of housing tenure can be used for the same physical type. or e-ample, connected

residents might be owned by a single entity and leased out, or owned separately with an agreement

covering the relationship between units and common areas and concerns

Major categories in North America and Europe

Attached multi/unit dwellings

Apartment0 An individual unit in a multi/unit building. 'he boundaries of the apartmentare generally defined by a perimeter of loced or locable doors. 1ften seen in multi/story apartment buildings.

2ulti/family house0 1ften seen in multi/story detached buildings, where each floor is aseparate apartment or unit.

'erraced house(a. . a. townhouseor rowhouse) 0 A number of single or multi/unit

buildings in a continuous row with shared walls and no intervening space.

$ondominium0 3uilding or comple-, similar to apartments, owned by individuals.$ommon grounds and common areas within the comple- are owned and shared ointly. 'hereare townhouseor rowhousestyle condominiums as well.

$ooperative(a. . a. co/op) 0 A type of multiple ownership in which the residents of amulti/unit housing comple- own shares in the cooperative corporation that owns the property,giving each resident the right to occupy a specific apartment or unit.



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25KALPATARU LIMITED

emi/detacheddwellings (in !#, a "semi" is by definition two units with a party wall).

+uple-0 'wo units with one shared wall. (in !#, a duple- is an apartment on more thanone storey)

ingle/family detached home

4ortable dwellings

2obile homes0 4otentially a full/time residence which can be (might not in practice be)movable on wheels.

5ouseboats0 A floating home

'ents0 !sually very temporary, with roof and walls consisting only of fabric/lie

material.

'he si6e of an apartment or house can be described in suare feet or meters. In the !nited tates,

this includes the area of "living space", e-cluding the garage and other non/living spaces. 'he

"suare meters" figure of a house in 7urope may report the total area of the walls enclosing the

home, thus including any attached garage and non/living spaces, which maes it important to inuire

what ind of surface definition has been used.

It can be described more roughly by the number of rooms. A studio apartmenthas a single bedroom

with no living room (possibly a separate itchen). A one/bedroom apartment has a living or dining

room separate from the bedroom. 'wo bedroom, three bedroom, and larger units are common. (A

bedroom is defined as a room with a closet for clothes storage.)

Major categories in India and the Asian Subcontinent

$o/operative 5ousing ocieties ($5)

$ondominiums

3uilder flats

$hawls

8illas

9anes 5ouses



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24KALPATARU LIMITED

'ianin

#othis

5avelis

Independent loors

9al +ora0 here people carry out commercial and

residential activities both.

'he si6e is measured in a6 (suare yards),


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22KALPATARU LIMITED

Inte"nationa! Rea! Estate

'he term international real estatedescribes a relatively new phenomenon, beginning in the =>?@s

and eeping pace with globali6ation. 'he term encompasses real property development, sales and

leasing transactions across national borders. International real estate could be viewed as one of the

most dynamic branches of real estate although it is, by definition, influenced by fluctuating maret

value in various sectors between countries, as can be evidenced by the @@? global credit crisis.

International real estate is best subdivided into two categories: international commercial real estate

and international residential real estate. ome e-amples of international real estate transactions are:

a citi6en of one country purchases a house in another country

a corporation headuartered in one country purchases or leases an office building anothercountry

a corporation or investment group in one country builds a hotel in another country

International commercial real estate

2ost international commercial real estate transactions will tae place between corporations and mayinvolve, lead to or be a conseuence of legal, design, urban planning, engineering, financing, and

construction wor. rom a national government perspective, attracting foreign investment into real

estate development proects can be a ey priority for increasing country revenue and a ey strategy

for increasing the availability of national infrastructure and amenities.

ome of the factors leading to the growth in the international commercial real estate sector are:



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2'KALPATARU LIMITED

the post/war growth in urban development and infrastructure in both developed and developing

nations

businessB evolution toward multi/national business operations;

the growth in international investment practices enabling investors to loo outside their own

countries for above average performing investments.

International residential real estate

2ost international residential real estate transactions are generated by individuals purchasing lots or

built units (including family homes, apartments, condominium units). 'hese purchases form the bul

of what is sometimes referred to as the vacationsecond home maret or residential tourism maret.

If a person wishes to initiate international real estate investment for the individualCs or the institutionCs

portfolio, the person or financial manager may consider multiple avenues. 'he indirect method of

entering international real estate investment may involve passive investment in securities that are

based on international real estate collateral or passive investment in international real estate service

firms and offices. 'he direct method of entering international real estate investment may involve total

acuisition or partial acuisition of the foreign property.

or developed countries whose +4 per capita is above threshold level, it is calculate the value of

institutional/grade real estate is DEF of national +4, which is consistent with data gathered.

5owever, to determine the si6e of institutional/grade real estate marets in developing countries

adustments are made because only the more afGuent segments of the population in those countries

have the wherewithal to use such real estate.

Recent Increase in Chinese Real Estate Investing in the United States

A maor increase in international real estate investing is taing place recently between $hina and the

!nited tates. In the !.., the $hinese are now the second/largest foreign buyers of homes, behind

$anadians, accounting for H.D billion of sales in the = months ended 2arch @==, up DF from the

previous = months, according to the %ational Association of *ealtors. 3uyers from $hina and 5ong

#ong also spent H=.= billion on commercial property in the !.. in @==, more than uadruple their

investment in @@?, says *eal $apital Analytics. $hinese investors are interested in commercialIndian Institute of Soia! We!fa"e and Business Mana#e$ent% Ko!&ata


24/98

2-KALPATARU LIMITED

proects, residential properties, hotels, golf courses, clubs, land, industrial warehouses, office

buildings, and shopping centers.

ome of the factors leading to the growth in the international residential real estate sector are:

the rise in international tourismand travel;

the baby boomergeneration reaching retirement age and looing for more fle-ible retirement

options;

the increase in available information on the orld ide eb regarding property listings in

countries around the world

'he term commercial property(also called commercial real estate, investment or income property) refers

to buildings or landintended to generate a profit, either from capital gainor rentalincome

Definition

$ommercial property includes office buildings, industrial property, medical centers, hotels, malls, retai

stores, farm land, multifamily housingbuildings, warehouses, and garages. In many states, residentia

propertycontaining more than a certain number of units ualifies as commercial property for

borrowing and ta- purposes.

Types of commercial property

$ommercial real estate is commonly divided into si- categories:

=. Office Buildings0 'his category includes singleFtenant properties, small professional office

buildings, downtown syscrapers, and everything in between.

. Industrial0 'his category ranges from smaller properties, often called Jle-K or J*L+K properties,

to larger office service or office warehouse properties to the very large Jbig bo-K industrial properties.

An important, defining characteristic of industrial space is $lear 5eight. $lear height is the actual

height, to the bottom of the steel girders in the interior of the building. 'his might be =DF=M feet for

smaller properties, and D@N feet for larger properties. e also consider the type and number of docs



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2.KALPATARU LIMITED

that the property has. 'hese can be rade 9evel, where the paring lot and the warehouse floor are

on the same level, to semiFdoc height at D inches, which is the height of a picup truc or delivery

truc, or a fullFdoc at D? inches which is semiFtruc height. ome buildings may even have a *ail

pur for train cars to load and unload.

O. Retail/Restaurant0 'his category includes pad sites on highway frontages, single tenant retail

buildings, small neighborhood shopping centers, larger centers with grocery store anchor tenants,

Jpower centersK with large anchor stores such as 3est 3uy, 4etmart, 1ffice2a-, and so on even

regional and outlet malls.

D. Multifamily0 'his category includes apartment comple-es or highFrise apartment buildings.

enerally, a fourple- or more is considered commercial real estate.

E. and0 'his category includes investment properties on undeveloped, raw, rural land in the path of

future development. 1r, infill land with an urban area, pad sites, and more.

M. Miscellaneous0 'his catch all category would include any other nonresidential properties such as

hotel, hospitality, medical, and selfFstorage developments, as well as many more. PDQ

!ategories of !ommercial Real Estate

!ategory E"amples

9eisure hotels, public houses, restaurants, cafes, sports facilities

*etail retail stores, shopping malls, shops

1ffice office buildings, serviced offices

Industrial industrial property, officewarehouses, garages, distribution centers

5ealthcare medical centres, hospitals, nursing homes



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2/KALPATARU LIMITED

2ultifamily (apartments) multifamily housing buildings

1f these, only the first five are classified as being commercial buildings. *esidential income property may also

signify multifamily apartments.

Additional commercial property information

#Elements of an In$estment in !ommercial %roperty

'he basic elements of an investment are cash inflows, outflows, timing of cash flows, and ris. Rour

ability to analy6e these elements is ey in providing services to investors in commercial real estate.

$ash inflows and outflows are the money that is put into, or received from, the property including the

original purchase cost and sale revenue over the entire life of the investment. An e-ample of this sort

of investment is a *eal estate fund.

$ash inflows include the following:

*ent

1perating e-pense recoveries

ees: 4aring, vending, services, etc.

4roceeds from sale

'a- 3enefits

+epreciation

'a- credits (e.g., historical)

$ash outflows include:



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20KALPATARU LIMITED

Initial investment (down payment)

All operating e-penses and ta-es

+ebt service (mortgage payment)

$apital e-penses and tenant leasing costs

$osts upon ale

'he timing of cash inflows and outflows is important to now in order to proect periods of positive andnegative cash flows. *is is dependent on maret conditions, current tenants, and the lielihood that

they will renew their leases yearFoverFyear. Rou need to be able to predict the probability that the

cash inflows and outflows will be in the amounts predicted, what is the probability that the timing of

them will be as predicted, and what the probability is that there may be une-pected cash flows, and in

what amounts they might occur.

'he total value of commercial property in the !nited tates was appro-imately H== trillion in @@>, as

measured by the $otar roupand published in the Journal of Real Estate Management.

According to *eal $apital Analytics, a %ew Ror real estate research firm, more than H=M@ billion of

commercial properties in the !nited tates are now in default, foreclosure, or banruptcy. In 7urope,

appro-imately half of the S>M@ billion of debt baced by 7uropean commercial real estate is e-pected

to reuire refinancingin the ne-t three years, according to 4roperty2all, a !#/based commercial

property news provider 4roperty 2all. Additionally, the economic conditions surrounding future

interest rate hies; which could put renewed pressure on valuations, complicate loan refinancing, and

impede debt servicing could cause maor dislocation in commercial real estate marets.

5owever, the contribution plowed into 7uropeBs economy in @= can be estimated at around

S?E billion according to 74*A and I%*78, not to mention social benefits of an efficient real estatesector. It is estimated that commercial property is responsible for securing around D million obs

across 7urope



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Real estate broker

'his article is about the %orth American practice. or other definitions and practices in othercountries, see *eal estate. or real property, see *eal property.

"*ealtor" redirects here. or the real estate industry trade association that refers to its members as

"*ealtors", see %ational Association of *ealtors.

A real estate bro&eror real estate agentis a person who acts as an intermediarybetween sellers

and buyers of real estatereal propertyand attempts to find sellers who wish to sell and buyers who

wish to buy. In the !nited tates, the relationship was originally established by reference tothe 7nglish common lawof agency, with the broer having a fiduciaryrelationship with his clients.

An estate agentbeing used as a term in the !nited #ingdommeans a person or organi6ation whose

business is to maretreal estate on behalf of clients, but there are significant differences between the

actions and liabilities of broers and estate agents in each country. 3eyond the !nited tates, other

countries tae maredly different approaches to the mareting and selling of real property.

In the !nited tates, however, real estate broers and their salespersons (commonly called "real

estate agents" or, in some states, "broers") assist sellers in mareting their property and selling it for

the highest possible price under the best terms.

Byer!s Agent

hen acting as a buyerBs agentwith a signed agreement (or, in many cases, verbal agreement, although a broer

may not be legally entitled to his commission unless the agreement is in writing), they assist buyers by helping them

purchase property for the lowest possible price under the best terms. 'he real estate broer is obligated to provide

fiduciary duties to whomever that broer services as a client, and this agency relationship can become very

confusing.



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Dal Agent

If the broer is helping both the buyer and the seller, this is referred to as a "dual agency."

'raditionally, the broer represents the seller, and his fiduciary duty is to the seller. If the broer

suggests to the buyer that he will help the buyer negotiate the best price, the broer is practicing

"undisclosed dual agency," which is unethical and illegal in all states under a dual agency transaction,

it is vital that the broer disclose to both parties whom he represents as a client and whom he

represents as a customer. A real estate broer owes his client fiduciary duties, which include care,

confidentiality, loyalty, obedience, accounting, and disclosure. 'o protect his license to practice, a realestate broer owes his customer fair and honest dealing and must reuest that both parties (seller

and buyer) sign a dual agency agreement.

"icensing

In most urisdictions in the !nited tates, a person must have a licensebefore they may

receive remunerationfor services rendered as a real estate broer. !nlicensed activity is illegal, but

buyers and sellers acting as principals in the sale or purchase of real estate are usually not reuiredto be licensed. In some states, lawyersare authori6ed to handle real estate sales for compensation

without being licensed as broers or agents .

The difference bet#een salespersons and brokers

Beforethe Multiple isting Ser$ice'MS(was introduced in =>M, when broers (and their

licensees) only represented sellers, the term "real estate salesperson" may have been more

appropriate than it is today, given the various ways that broers and licensees now help buyers

through the process rather than merely "selling" them a property. 9egally, however, the term

"salesperson" is still used in many states to describe a real estate licensee)



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Real estate education

'o become licensed, most states reuire that an applicant tae a minimum number of classes before

taing the state licensing e-am. uch education is often provided by real estate broerages, to

maintain a supply of new agents.

In many states, the real estate licensee (acting as an agent of a broer) must disclose to prospective

buyers and sellers who represents whom. ee below for a broerlicensee relationship to sellersand

their relationship to buyers.

hile some people may refer to any licensed real estate agent as a real estate broer, a licensed real

estate agent is a professional who has obtained a real estate broerBs license. 'he licensee is one

who has obtained a real estate license and is employed by a real estate broer. 1ften, licensees refer

to themselves as an "agents", but the true agent is the broer, and the licensee is a representative of

the broer, often referred to as the real estate "salesperson." A real estate broer who wors for

another broer is sometimes referred to as a unior broer.

In the !nited tates, there are commonly two levels of real estate professionals licensed by the

individual states but not by the federal government:

Real estate salesperson 'or* in some states* Real estate bro&er(

hen a person first becomes licensed to become a real estate agent, they obtain a real estate

salespersonBs license (some states use the term "broer") from the state in which he will practice. 'o

obtain a real estate license, the candidate must tae specific coursewor (of between D@ and >@

hours) and pass a state e-am on real estate law and practice. 'o wor, salespersons must be

associated with (and act under the authority of) a real estate broer. In +elaware, for e-ample, the

licensing course reuires the candidate to tae >> classroom hoursin order to ualify to sit for the

state and national e-amination. In each successive year thereafter, the license holder must

participate in continuing educationin order to remain abreast of state and national changes.

2any states also have reciprocal agreements with other states, allowing a licensed individual from a

ualified state to tae the second stateBs e-am without completing the course reuirements or, in

some cases, tae only a state law e-am.



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Real estate bro&er 'or* in some states* +ualifying bro&er(

After gaining some years of e-perience in real estate sales, a salesperson may decide to become

licensed as a real estate broer (or 4rincipalualifying broer) in order to own, manage, or operate

their own broerage. In addition, some states allow college graduates to apply for a broerBs licensewithout years of e-perience. $ollege graduates fall into this category once they have completed the

state/reuired courses as well. $alifornia allows licensed attorneys to become broers upon passing

the broer e-am without having to tae the reuisite courses reuired of an agent. $ommonly more

course wor and a broerBs state e-am on real estate law must be passed. !pon obtaining a broerBs

license, a real estate agent may continue to wor for another broer in a similar capacity as before

(often referred to as a broer associate or associate broer) or tae charge of hisher own broerage

and hire other salespersons (or broer) licensees. 3ecoming a branch office manager may or may not

reuire a broerBs license. ome states allow licensed attorneys to become real estate broers

without taing any e-am. In some states, there are no "salespeople" as all licensees are broers.

In the !nited tates, Realtor(capitali6ed) is a registered trademar of the %ational Association of

*ealtors(%A*). 'here are =.O million *ealtors, mostly in the !nited tates, and an additional =

million licensed real estate agents who are not members of %A* and cannot use the trademared title

of "realtor". 5owever, the !.. 3ureau of 9abor tatistics claims only about M@@,@@@ woring

broerssalespersons.

Agency relationships #ith clients verss non$agency relationships #ith cstomers

*elationship: $onventionally, the broer provides a conventional full/service, commission/

based broerage relationship under a signed listing agreement with a seller or a "buyer

representation" agreement with a buyer, thus creating under common law in most states an

agency relationship with fiduciary obligations. 'he seller or buyer is then a client of the broer.

ome states also have statutes that define and control the nature of the representation.

Agency relationships in residential real estate transactions involve the legal representation by a real

estate broer (on behalf of a real estate company) of the principal, whether that person(s) is a buyer

or a seller. 'he broer and his licensed real estate agents then become the agent of the principal.

%on/agency relationship: where no written agreement or fiduciary relationship e-ists, a real

estate broer and his agents wor with a principal who is nown as the broerBs customer. hen a

buyer who has not entered into a 3uyer Agency agreement with the broer buys a property, that

broer functions as the sub/agentof the sellerBs broer. hen a seller chooses to wor with a

transaction broer, there is no agency relationship created.



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,ransaction bro&ers

ome state *eal 7state $ommissions / notably loridaBs after =>> (and e-tended in @@O) and

$oloradoBs after =>>D (with changes in @@O) / created the option of having no agency or fiduciary

relationship between broers and sellers or buyers. 5aving no more than a facilitator relationship,

transaction broers assist buyers, sellers, or both during the transaction without representing the

interests of either party who may then be regarded as customers.

As noted by the outh 3roward 3oard of *ealtors, Inc. in a letter to tate of lorida legislative

committees:

"'he 'ransaction 3roer crafts a transaction by bringing a willing buyer and a willing seller

together and assists with the closing of details. 'he 'ransaction 3roer is not a fiduciary of any

party, but must abide by law as well as professional and ethical standards." (such

as %A*$ode of 7thics).

'he result was that in @@O, lorida created a system where the default broerage relationship

had "all licensees operating as transaction broers, unless a single agent or no broerage

relationship is established, in writing, with the customer" and the statute reuired written

disclosure of the transaction broerage relationship to the buyer or seller customer only through

Tuly =, @@?.

In the case of both lorida and $olorado, dual agency and sub/agency (where both listing andselling agents represent the seller) no longer e-ist.

-ual or limited agency

+ual agency occurs when the same broerage represents both the seller and the buyer under

written agreements. Individual state laws vary and interpret dual agency rather differently.

2any states no longer allow dual agency. Instead, "transaction broerage" provides the buyer and

seller with a limited form of representation but without any fiduciary obligations(see lorida law).

3uyers and sellers are generally advised to consult a licensed real estate professional for a

written definition of an individual stateBs laws of agency, and many states reuire written

+isclosures to be signed by all parties outlining the duties and obligations.



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If state law allows for the same agent to represent both the buyer and the seller in a single

transaction, the broerageagent is typically considered to be a Dual Agent. pecial lawsrules

often apply to dual agents, especially in negotiating price.

In some states, +ual Agency can be practiced in situations where the same broerage (but notagent) represent both the buyer and the seller. If one agent from the broerage has a home

listed and another agent from that broerage has a buyer/broerage agreement with a buyer

who wishes to buy the listed property, +ual Agency occurs by allowing each agent to be

designated as an "intra/company" agent. 1nly the broer himself is the +ual Agent.

ome states do allow a broer and one agent to represent both sides of the transaction as

dual agents. In those situations, conflict of interest is more liely to occur, typically resulting in

the loss of advocacy for both parties.

Types of services that a broker can provide

ince each provinceBs and stateBs laws may differ, it is generally advised that prospective sellers

or buyers consult a licensed real estate professional.

ome e-amples:



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$omparative 2aret Analysis ($2A) U an estimate of the homeBs value compared with others.

'his differs from an appraisal in that property currently for sale may be taen into

consideration. (competition for the subect property)

'otal 2aret 1verview U an obective method for determining a homeBs value, where a $2A issubective.

7-posure U 2areting the real property to prospective buyers.

acilitating a 4urchase U guiding a buyer through the process.

acilitating a ale U guiding a seller through the selling process.

31document preparation U preparing necessary paperwor for "or ale 3y 1wner"

sellers.

*eal estate appraisalU in most states, only if the broer is also licensed as an appraiser.

5ome elling #its U guides advising how to maret and sell a property.

5ourly $onsulting for a fee, based on the clientBs needs.

9easing for a fee or percentage of the gross lease value.

4roperty 2anagement

7-changing property.

Auctioning property.

4reparing contracts and leases. (not in all states)

'hese services are also changing as a variety of real estate trendstransform the industry.



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Real estate appraisal

Real estate appraisal, property $aluationor land $aluationis the process of valuing real

property(usually maret value). *eal estate transactions reuire appraisals because they occur

infreuently and every property is uniue(especially their location, a ey factor in valuation), unlie

corporate stocs, which are traded daily and are identical (thus a centrali6ed alrasian auctionlie

a stoc e-changeis unrealistic). Appraiser reports form the basis for mortgageloans,

settling estatesand divorces, ta-ation, and so on. ometimes the report is used by both parties to set

the sale price of a property.

2ost, but not all, countries reuire appraisers to be licensed or certified. Appraisers are often nownas "property valuers" or "land valuers"; in 3ritish 7nglishthey are "valuation surveyors". If the

appraiserBs opinion is based on maret value, then it must also be based on the highest and best

useof the real property. or mortgage valuations of improved !.. residential properties, appraisals

are generally reported on a standardi6ed form lie the !niform *esidential Appraisal

*eportAppraisals of more comple- properties (e.g., income/producing, raw land) usually include a

narrative appraisal report.

Types of vale

'here are several types and definitions of value sought by a real estate appraisal. ome of the most

common are:

Mar&et $alue0 'he price at which an asset would trade in a competitive alrasian

auctionsetting. 2aret value is usually interchangeable with open market valueor fair

value. International 8aluation tandards(I8) define:

Mar&et $alue0 the estimated amount for which an asset or liability should e-change onthe valuation datebetween a willing buyer and a willing seller in an armBs length transaction,after proper mareting and where the parties had each acted nowledgeably, prudently andwithout compulsion.

.alueinuse, or use $alue0 'he net present value(%48) of a cash flow that an asset

generates for a specific owner under a specific use. 8alue/in/use is the value to one particular

user, and may be above or below the maret value of a property.

In$estment $alue0 is the value to one particular investor, and may or may not be higher than

the maret value of a property. +ifferences between the investment valueof an asset and



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its market valueprovide the motivation for buyers or sellers to enter the

maretplace. International 8aluation tandards(I8) define:

In$estment $alue0 the value of an asset to the owner or a prospective owner for individualinvestment or operational obectives.

Insurable $alue0 is the value of real property covered by an insurance policy. enerally it

does not include the site value.

i+uidation $alue0 may be analy6ed as either a forced li+uidationor an orderly

li+uidationand is a commonly sought standard of value in banruptcy proceedings. It

assumes a seller who is compelled to sell after an e-posure period which is less than the

maret/normal time/frame.

%rice $ersus $alue

'here can be differences between what the property is really worth (maret value) and what it

cost to buy it (price). A price paid might not represent that propertyBs maret value. ometimes,

special considerations may have been present, such as a special relationship between the

buyer and the seller where one party had control or significant influence over the other party.

In other cases, the transaction may have been ust one of several properties sold or traded

between two parties. In such cases, the price paid for any particular piece is not its maret

"value" (with the idea usually being, though, that all the pieces and prices add up to maret

value of all the parts) but rather its maret "price".

At other times, a buyer may willingly pay a premium price, above the generally acceptedmaret value, if his subective valuation of the property (its investment valuefor him) was

higher than the maret value. 1ne specific e-ample of this is an owner of a neighboring

property who, by combining his own property with the subect property, could obtain

economies/of/scale. imilar situations sometimes happen in corporate finance. or e-ample,

this can occur when a merger or acuisition happens at a price which is higher than the value

represented by the price of the underlying stoc. 'he usual e-planation for these types

of mergers and acuisitionsis that "the sum is greater than its parts", since full ownership of a

company provides full control of it. 'his is something that purchasers will sometimes pay a

high price for. 'his situation can happen in real estate purchases too.

3ut the most common reason for value differing from price is that either the buyer or the seller

is uninformed as to what a propertyBs maret value is but nevertheless agrees on a contract at

a certain price which is either too e-pensive or too cheap. 'his is unfortunate for one of the

two parties. It is the obligation of a real property appraiser to estimate the true market valueof

a property and not its market price.



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Mar&et $alue definitions in the 0nited States

In the !nited tates, appraisals are for a certain type of value (e.g., foreclosure value, fair

maret value, distressed sale value, investment value). 'he most commonly used definition of

value is 2aret 8alue. hile !niform tandards of 4rofessional Appraisal 4ractice(!4A4)does not define 2aret 8alue, it provides general guidance for how 2aret 8alue should be

defined:

a type of value, stated as an opinion, that presumes the transfer or sale of a property as of a

certain date, under specific conditions set forth in the definition of the term identified by the

appraiser as applicable in an appraisal.

'hus, the definition of value used in an appraisal or $urrent 2aret Analysis ($2A) analysis

and report is a set of assumptions about the maret in which the subect property may

transact. It affects the choice of comparable data for use in the analysis. It can also affect the

method used to value the property. or e-ample, tree valuecan contribute up to F of

property value.

Three approaches to vale

'here are three traditional groups of methodologies for determining value. 'hese are usually

referred to as the "three approaches to valueK which are generally independent of each other:

'he cost approach(the buyer will not pay more for a property than it would cost to build aneuivalent).

'he sales comparison approach(comparing a propertyBs characteristics with those of

comparable properties that have recently sold in similar transactions).

'he income approach(similar to the methods used for financial valuation, securities

analysis or bond pricing).

5owever, the recent trend of the business tends to be toward the use of a scientific

methodology of appraisal which relies on the foundation of uantitative/data ris, andgeographical based approaches. 4agourt6i et al.have provided a review on the methods used

in the industry by comparison between conventional approaches and advanced ones.

As mentioned before, an appraiser can generally choose from three approaches to determine

value. 1ne or two of these approaches will usually be most applicable, with the other

approach or approaches usually being less useful. 'he appraiser has to thin about the



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'1KALPATARU LIMITED

"scope of wor", the type of value, the property itself, and the uality and uantity of data

available for each approach. %o overarching statement can be made that one approach or

another is always better than one of the other approaches.

'he appraiser has to thin about the way that most buyers usually buy a given type ofproperty. hat appraisal method do most buyers use for the type of property being valuedV

'his generally guides the appraiserBs thining on the best valuation method, in conunction

with the available data. or instance, appraisals of properties that are typically purchased by

investors (e.g., syscrapers, office buildings) may give greater weight to the Income Approach.

3uyers interested in purchasing single family residential property would rather compare price,

in this case the ales $omparison Approach (maret analysis approach) would be more

applicable. 'he third and final approach to value is the $ost Approach to value. 'he $ost

Approach to value is most useful in determining insurable value, and cost to construct a new

structure or building.

or e-ample, single apartment buildings of a given uality tend to sell at a particular price per

apartment. In many of those cases, the sales comparison approach may be more applicable.

1n the other hand, a multiple/building apartment comple- would usually be valued by the

income approach, as that would follow how most buyers would value it. As another e-ample,

single/family houses are most commonly valued with greatest weighting to the sales

comparison approach. 5owever, if a single/family dwelling is in a neighborhood where all or

most of the dwellings are rental units, then some variant of the income approach may be more

useful. o the choice of valuation method can change depending upon the circumstances,

even if the property being valued does not change much.

,he cost approach

'he cost approachwas once called the summation approach. 'he theory is that the value of

a property can be estimated by summing the land value and the depreciatedvalue of any

improvements. 'he value of the improvements is often referred to by the abbreviation *$%9+

(for "reproductionreplacement cost new less depreciation"). *eproduction refers to

reproducing an e-act replica; replacement cost refers to the cost of building a house or other

improvement which has the same utility, but using modern design, wormanship andmaterials. In practice, appraisers almost always use replacement cost and then deduct a

factor for any functional dis/utility associated with the age of the subect property. An e-ception

to the general rule of using the replacement cost, is for some insurance value appraisals. In

those cases, reproduction of the e-act asset after a destructive event lie a fire is the goal.



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In most instances when the cost approach is involved, the overall methodology is a hybrid of

the cost and sales comparison approaches (representing both the suppliersB costs and the

prices that customers are seeing). or e-ample, the replacement cost to construct a building

can be determined by adding the labor, material, and other costs. 1n the other hand, land

values and depreciation must be derived from an analysis of comparable sales data.

'he cost approach is considered most reliable when used on newer structures, but the

method tends to become less reliable for older properties. 'he cost approach is often the only

reliable approach when dealing with special use properties (e.g., public assembly, marinas).

,he sales comparison approach

'he sales comparison approach is based primarily on the principle of substitution. 'his

approach assumes a prudent (or rational) individual will pay no more for a property than it

would cost to purchase a comparable substitute property. 'he approach recogni6es that a

typical buyer will compare asing prices and see to purchase the property that meets his or

her wants and needs for the lowest cost. In developing the sales comparison approach, the

appraiser attempts to interpret and measurethe actions of parties involved in the maretplace,

including buyers, sellers, and investors.

-ata collection methods and $aluation process+ata is collected on recent sales of

properties similar to the subect being valued, called "comparables". 1nly 19+ properties

may be used in an appraisal and determination of a propertyBs value, as they represent

amounts actually paid or agreed upon for properties. ources of comparable data include realestate publications, public records, buyers, sellers, real estate broers andor agents,

appraisers, and so on. Important details of each comparable sale are described in the

appraisal report. ince comparable sales are not identical to the subect property, adustments

may be made for date of sale, location, style, amenities, suare footage, site si6e, etc. 'he

main idea is to simulate the price that would have been paid if each comparable sale were

identical to the subect property. If the comparable is superior to the subect in a factor or

aspect, then a downward adustment is needed for that factor. 9iewise, if the comparable is

inferior to the subect in an aspect, then an upward adustment for that aspect is needed. 'he

adustment is somewhat subective and relies on the appraiserBs training and e-perience.rom the analysis of the group of adusted sales prices of the comparable sales, the appraiser

selects an indicator of value that is representative of the subect property. It is possible for

various appraisers to choose different indicator of value which ultimately will provide different

property value.

Steps in the sales comparison approach



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*esearch the maret to obtain information pertaining to sales, and pending sales that are

similar to the subect property

. Investigate the maret data to determine whether they are factually correct and accurate

+etermine relevant units of comparison (e.g., sales price per suare foot), and develop a

comparative analysis for each

$ompare the subect and comparable sales according to the elements of comparison and

adust as appropriate

*econcile the multiple value indications that result from the adustment (upward or

downward) of the comparable sales into a single value indication

,he income capitali1ation approach

,he income capitali1ation approach(often referred to simply as the "income approach") is

used to value commercial and investment properties. 3ecause it is intended to directly reflect

or model the e-pectations and behaviors of typical maret participants, this approach is

generally considered the most applicable valuation techniue for income/producing properties,

where sufficient maret data e-ists.

In a commercial income/producing property this approach capitali6es an income stream into a

value indication. 'his can be done using revenue multipliers or capitali6ation ratesapplied to a%et 1perating Income (%1I). !sually, an %1I has been stabili6ed so as not to place too much

weight on a very recent event. An e-ample of this is an unleased building which, technically,

has no %1I. A stabili6ed %1I would assume that the building is leased at a normal rate, and to

usual occupancy levels. 'he %et 1perating Income (%1I) is gross potential income (4I), less

vacancy and collection loss (W 7ffective ross Income) less operating e-penses (but

e-cluding debt service, income ta-es, andor depreciation charges applied by accountants).

Alternatively, multiple years of net operating income can be valued by a discounted cash

flowanalysis (+$) model. 'he +$ model is widely used to value larger and more e-pensiveincome/producing properties, such as large office towers or maor shopping centres. 'his

techniue applies maret/supported yields (or discount rates) to proected future cash flows

(such as annual income figures and typically a lump reversion from the eventual sale of the

property) to arrive at a present value indication.



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02 $aluation methods

In the !nited #ingdom, valuation methodology has traditionally been classified into five

methods:

3) !omparati$e method. !sed for most types of property where there is good evidence of

previous sales. 'his is analogous to the sales comparison approach outlined above.

4) In$estment method. !sed for most commercial (and residential) property that is producing

future cash flows through the letting of the property. If the current estimated rental value (7*8)

and the passing income are nown, as well as the maret/determined euivalent yield, then

the property value can be determined by means of a simple model. %ote that this method is

really a comparison method, since the main variables are determined in the maret. In

standard !.. practice, however, the closely related capitali6ing of %1I is confounded with the

+$ method under the general classification of the income capitali6ation approach (see

above).

5) Residual method. !sed for properties ripe for development or redevelopment or for bare

land only

6) %rofit method. !sed for trading properties where evidence of rates is slight, such as hotels,

restaurants and old/age homes. A three/year average of operating income (derived from the

profit and loss or income statement) is capitali6ed using an appropriate yield. %ote that since

the variables used are inherent to the property and are not maret/derived, therefore unlessappropriate adustments are made, the resulting value will be value/in/use or investment

value, not maret value.

7) !ost method. !sed for land and buildings of special character for which profit figures

cannot be obtained or land and buildings for which there is no maret because of their public

service or heritage characteristics. 3oth the residual method and the cost method would be

grouped in the !nited tates under the cost approach(see above).

%rther considerations

Scope of 8or&

hile the !niform tandards of 4rofessional Appraisal 4ractice(!4A4) has always reuired

appraisers to identify the scope of wor needed to produce credible results, it became clear in

recent years that appraisers did not fully understand the process for developing this

adeuately. In formulating the scope of wor for a credible appraisal, the concept of



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a limitedversus completeappraisal and the use of the +eparture *ule caused confusion to

clients, appraisers, and appraisal reviewers. In order to deal with this, !4A4 was updated in

@@M with what came to be nown as the cope of or 4roect. ollowing this, !4A4

eliminated both the +eparture *ule and the concept of a limited appraisal, and a new cope of

or rule was created. In this, appraisers were to identify si- ey parts of the appraisalproblem at the beginning of each assignment:

$lient and other intended users

Intended use of the appraisal and appraisal report

+efinition of value (e.g., maret, foreclosure, investment)

Any hypothetical conditions or e-traordinary assumptions

7ffective date of the appraisal analysis

alient features of the subect property

3ased on these factors, the appraiser must identify the scope of wor needed, including the

methodologies to be used, the e-tent of investigation, and the applicable approaches to value.

$urrently, minimum standards for scope of wor are:

7-pectations of the client and other users

'he actions of the appraiserBs peers who carry out similar assignments

'he scope of wor is the first step in any appraisal process. ithout a strictly defined scope of

wor, an appraisalBs conclusions may not be viable. 3y defining the scope of wor, an

appraiser can properly develop a value for a given property for the intended user, and for the

intended use of the appraisal. 'he whole idea of "scope of wor" is to provide clear

e-pectations and guidelines for all parties as to what the appraisal report does, and does not,

cover; and how much wor has gone into it.

,ypes of o8nership interest

'he type of real estate "interest" that is being valued, must also be nown and stated in the report. !sually,

for most sales, or mortgage financings, the fee simpleinterest is being valued. 'he fee simple

interest is the most complete bundle of rights available. 5owever, in many situations, and inIndian Institute of Soia! We!fa"e and Business Mana#e$ent% Ko!&ata


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many societies which do not follow 7nglish $ommon 9awor the %apoleonic $ode, some other

interest may be more common. hile there are many different possible interests in real estate,

the three most common are:

9ee simple $alue(nown in the !# as freehold) 0 'he most complete ownership in realestate, subect in common law countries to the powers reserved to the state (ta-ation,

escheat, eminent domain, and police power)

eased fee $alue0 'his is simply the fee simple interest encumbered by a lease. If the

lease is at maret rent, then the leased fee value and the fee simple value are eual.

5owever, if the tenant pays more or less than maret, the residual owned by the leased

fee holder, plus the maret value of the tenancy, may be more or less than the fee simple

value.

easehold $alue0 'he interest held by a tenant. If the tenant pays maret rent, then the

leasehold has no maret value. 5owever, if the tenant pays less than maret, the

difference between the present value of what is paid and the present value of maret rents

would be a positive leasehold value. or e-ample, a maor chain retailer may be able to

negotiate a below/maret lease to serve as the anchor tenant for a shopping center. 'his

leasehold value may be transferable to another anchor tenant, and if so the retail tenant

has a positive interest in the real estate.

:ome inspection

If a home inspectionis performed prior to the appraisal and that report is provided to the

appraiser, a more useful appraisal can result. 'his is because the appraiser, who is not e-pert

home inspector, will be told if there are substantial construction defects or maor repairs

reuired. 'his information can cause the appraiser to arrive at a different, probably lower,

opinion of value. 'his information may be particularly helpful if one or both of the parties

reuesting the appraisal may end up in possession of the property. 'his is sometimes the case

with property in a divorce settlement or a legal udgment.

Real estate appraisal data entry

Appraisers provide all the data needed to input in appraisal reports. A data entry team does

the rest; it searches, consolidates and types the data into reports, such as subect data and

comparable grid prior sales history. 2ost data entry organisations wor D hours a day, days

a wee, OME days a year. 'he appraiser sends empty reports, and the data entry team wors

all day and night, even while the appraiser is sleeping. 'his process increases the appraiserBs

efficiency, and frees up hisher time.



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&ass appraisal and atomated valation models

Automated $aluation models(A82s) are growing in acceptance. 'hese rely on statistical

models such as multiple regression analysisor geographic information systems (I) hile

A82s can be uite accurate, particularly when used in a very homogeneous area, there isalso evidence that A82s are not accurate in other instances such as when they are used in

rural areas, or when the appraised property does not conform well to the neighborhood. A82s

have also gained favor in class actionlitigation, and have been substantiated in numerous

cases, both in federal and state courts, as the appropriate method for dealing with large/scale

real estate litigation, such as contaminated neighborhoods

Real estate trendsA real estate trendis any consistent pattern or change in the general direction of the real

estateindustry which, over the course of time, causes a statistically noticeable change. 'his

phenomenon can be a result of the economy, a change in mortgagerates, consumer speculations, or

other fundamental and non/fundamental reasons.

'roperty vales declining instead of rising

2%reports that home prices have dropped by a record amount and illustrates with a chart of

historical real estate prices. *eal estate property values have trended upward in the range of /EF

almost every year since orld ar II, but since @@M they have declined. rom @@ to @@? prices

declined as much as O>F per year /though the average decline appears to be lower.

Byer agency gro#th

At one time, all real estate broersand agents, or *ealtors, practiced "single agency," meaning they

represented only the buyer or the seller. In the =>>@s, the concept of buyer agencybecame popular,

allowing a buyer to retain an agent who would represent the best interests of the buyer alone. 'he

first national company to provide this service was 'he 3uyerBs Agent, Inc. A @@? study by onsumer

Reportsindicates that prior to this development, a *ealtor was presumed by state law to be woring

for the seller. 'he same study shows that buyers using buyer agents obtained a savings of HE@@@ in

the price of the home as compared to prices paid by unrepresented buyers. It remains true that an

unrepresented real estate buyer can still call the sellers agent to arrange a showing of the property. In



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such cases, the buyer should be advised by Agency +isclosure 9aws (a state law in every state in the

!..) that any information obtained, as well as all conversations and negotiations undertaen, will be

for the benefit of the seller.

"o#er commission rates

5istorical rates are presented in a report by the overnment Accountability 1ffice, $ongressBs

investigative arm. A @@E study of real estate commission rates, reported that realtors tended to

charge, "about E percent to percent of a propertyBs selling price...". 2ore recently, $3 %ews, "M@

2inutes" television news maga6ine reported in @@ that competitive pressure resulting from a record

number of licensed agents has driven down the average sales commission rates paid by sellers. A

new breed of maretplaces that enable agents to compete for sellers further adds pressure to the

commission rate structure.

&arketing trends

'he Internethas became maor lead generationmethod real estate mareting, eclipsing local

newspapers and all other sources as the consumers most preferred method to learn about homes for

sale. "An overwhelming maority (?F) of recent home buyers in the ! say they used the internet asan information resource during their home/buying process, and nearly one/third say they first learned

about their newly purchased home from an online channel, according to a study by the %ational

Association of *ealtors (%A*). 2aority of real estate companies use popular internet mareting

methods lie 71, advertising and social media.

ebsites lie $raigslist(!nited tates), +aft.ie (*epublic of Ireland) and umtree(!#) became in

=st century main sources for both buyers and sellers. *apid changes in maret environment forced

some countries to introduce new laws regulating real property maret in the web.

7ven with introduction of internet, traditional media and methods of generating leads were still an

important part of *eal 7state trade:



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'hough the internet was the most popular source, buyers also cited information from real/estate

agents (?EF), yard signs (MF), open houses (D?F) and print or newspaper ads (DF). ewer

buyers relied on home boos or maga6ines, home builders, television, billboards and relocation

companies.

US government involvement

'he !nited tates +epartment of Tustice Antitrust +ivisionannounced the launch of a new website in

1ctober @@ to "educate consumersand policymaers about the potential benefits that competition

can bring to consumers of real estate broerage services and the barriers that inhibit that

competition." Among other findings, they report that certain new sales models can reduce consumer

home sales costs "by thousands of dollars. or e-ample, in states that allow open competition, some

buyerBs broers rebate up to two/thirds of their commissionto the customer, and some sellerBs broers

offer limited/service pacages that let sellers list their homes on the local 2ultiple 9isting

ervice(29) for as little as a few hundred dollars."



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Real estate economicsReal estate economicsis the application of economic techniues to real estate marets. It tries to

describe, e-plain, and predict patterns of prices, supply, and demand. 'he closely related field

of housing economicsis narrower in scope, concentrating on residential real estate marets, while

the research of real estate trendsfocuses on the business and structural changes affecting the

industry. 3oth draw on partial euilibrium analysis (supply and demand), urban economics, spatial

economics, e-tensive research, surveys, and finance.

(vervie# of real estate markets

'he main participants in real estate marets are:

O8ner/user: 'hese people are both owners and tenants. 'hey purchase houses

or commercial propertyas an investment and also to live in or utili6e as a business.

O8ner: 'hese people are pure investors. 'hey do not consume the real estate that they

purchase. 'ypically they rent out or lease the property to someone else.

Renter: 'hese people are pure consumers.

-e$elopers: 'hese people prepare raw land for building, which results in new products for the

maret.

Reno$ators: 'hese people supply refurbished buildings to the maret.

9acilitators: 'his group includes bans, real estate broers, lawyers, and others that facilitate

the purchase and sale of real estate.

'he owneruser, owner, and renter form the demand side of the maret, while the developers and

renovators form the supply side. In order to apply simple supply and demand analysis to real estate

marets, a number of modifications need to be made to standard microeconomic assumptions and

procedures. In particular, the uniue characteristics of the real estate maret must be accommodated.

'hese characteristics include:

-urability)*eal estate is durable. A building can last for decades or even centuries, and the

land underneath it is practically indestructible. 3ecause of this, real estate marets are modeled

as a stock!flow market. About >?F of supply consists of the stoc of e-isting houses, while about

F consists of the flow of new development. 'he stoc of real estate supply in any period is



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determined by the e-isting stoc in the previous period, the rate of deterioration of the e-isting

stoc, the rate of renovation of the e-isting stoc, and the flow of new development in the current

period. 'he effect of real estate maret adustments tend to be mitigated by the relatively large

stoc of e-isting buildings.

:eterogeneity)7very unit of real estate is uniue in terms of its location, the building, and its

financing. 'his maes pricing difficult, increases search costs, creates information asymmetry,

and greatly restricts substitutability. 'o get around this problem, economists, beginning with 2uth

(=>M@), define supply in terms of service units; that is, any physical unit can be deconstructed into

the services that it provides. 1lsen (=>M>) describes these units of housing services as

an unobservable theoretical construct. 5ousing stoc depreciates, maing it ualitatively different

from new buildings. 'he maret/euilibrating process operates across multiple uality levels.

urther, the real estate maret is typically divided into residential, commercial, and industrial

segments. It can also be further divided into subcategories lie recreational, income/generating,historical or protected, and the lie.

:igh transaction costs)3uying andor moving into a home costs much more than most types

of transactions. 'he costs include search costs, real estate fees, moving costs, legal fees, land

transfer ta-es, and deed registration fees. 'ransaction costs for the seller typically range between

=.EF and MF of the purchase price. In some countries in continental 7urope, transaction costs for

both buyer and seller can range between =EF and @F.

ong time delays)'he maret adustment process is subect to time delays due to the length

of time it taes to finance, design, and construct new supply and also due to the relatively slow

rate of change of demand. 3ecause of these lags, there is great potential for diseuilibrium in the

short run. Adustment mechanisms tend to be slow relative to more fluid marets.

Both an in$estment good and a consumption good)*eal estate can be purchased with the

e-pectation of attaining a return (an investment good), with the intention of using it (a

consumption good), or both. 'hese functions may be separated (with maret participants

concentrating on one or the other function) or combined (in the case of the person that lives in a

house that they own). 'his dual nature of the good means that it is not uncommon for people

to over/investin real estateUthat is, to invest more money in an asset than it is worth on the openmaret.

Immobility)*eal estate is locationally immobile (save for mobile homes, but the land

underneath them is still immobile). $onsumers come to the good rather than the good going to the

consumer. 3ecause of this, there can be no physical maretplace. 'his spatial fi-ity means that

maret adustment must occur by people moving to dwelling units, rather than the movement of



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the goods. or e-ample, if tastes change and more people demand suburban houses, people

must find housing in the suburbs, because it is impossible to bring their e-isting house and lot to

the suburb (even a mobile home owner, who could move the house, must still find a new lot).

patial fi-ity combined with the close pro-imity of housing units in urban areas suggest the

potential for e-ternalities inherent in a given location.

Demand for hosing

'he main determinants of the demand for housing are demographic. 3ut other factors, lie income,

price of housing, cost and availability of credit, consumer preferences, investor preferences, price of

substitutes, and price of complements, all play a role.

'he core demographicvariables are population si6e and population growth: the more people in the

economy, the greater the demand for housing. 3ut this is an oversimplification. It is necessary to

consider family si6e, the age composition of the family, the number of first and second children, net

migration (immigration minus emigration), non/family household formation, the number of double/

family households, death rates, divorce rates, and marriages. In housing economics, the elemental

unit of analysis is not the individual, as it is in standard partial euilibrium models. *ather, it is

households, which demand housing services: typically one household per house. 'he si6e and

demographic composition of households is variable and not entirely e-ogenous. It is endogenous to

the housing maret in the sense that as the price of housing services increase, household si6e will

tend also to increase.

Income is also an important determinant. 7mpirical measures of the income elasticity of demandin

%orth America range from @.E to @.> (+e 9eeuw =>=). If permanent incomeelasticity is measured,

the results are slightly higher (#ain and E) because transitory income varies from year to

year and across individuals, so positive transitory income will tend to cancel out negative transitory

income. 2any housing economists use permanent income rather than annual income because of the

high cost of purchasing real estate. or many people, real estate will be the costliest item they will

ever buy.

'he price of housing is also an important factor. 'he price elasticityof the demand for housing

services in %orth America is estimated as negative @. by 4olinsy and 7llwood (=>>), and as

negative @.> by 2aisel, 3urnham, and Austin (=>=).



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An individual householdBs housing demand can be modeled with standard utilitychoice theory. A utility

function, such as !W!(X=,X,XO,XD,...Xn), can be constructed, in which the householdBs utility is a

function of various goods and services (Xs). 'his will be subect to a budget constraintsuch as

4=X=N4XN...4nXnWR, where R is the householdBs available income and the 4s are the prices for

the various goods and services. 'he euality indicates that the money spent on all the goods andservices must be eual to the available income. 3ecause this is unrealistic, the model must be

adusted to allow for borrowing and saving. A measure of wealth, lifetime income, or permanent

income is reuired. 'he model must also be adusted to account for the heterogeneity of real estate.

'his can be done by deconstructing the utility function. If housing services (XD) are separated into its

constituent components (&=,&,&O,&D,...&n), the utility function can be rewritten as !W!(X=,X,XO,

(&=,&,&O,&D,...&n)...Xn). 3y varying the price of housing services (XD) and solving for points of

optimal utility, the householdBs demand schedule for housing services can be constructed. 2aret

demand is calculated by summing all individual household demands.

Ad)stment mechanism

'he basic adustment mechanism is a stocflow model to reflect the fact that about >?F the maret is e-isting stoc

and about F is the flow of new buildings.

In the diagram to the ri

Documents

A Project Report on Kalpataru