Submitted by : Alok Vyas
Urban Planning 631
I come from India. We own a residential plot of land with a building on its premises, at a prime location in Central Mumbai, (originally Bombay). This premise is in one of the most respected and well-planned localities, Hindu Colony at Dadar in Central Mumbai. Dadar is just 30 minutes drive away from the South Mumbai downtown area where most of the business districts and offices are located. Around 1994-95, there was a tremendous surge in real estate prices, much so that at one time, downtown Mumbai commanded better real estate than those even, in New York ! The prices varied something in the astronomical range of Rs. 20,000 to Rs. 40,000 per square feet per month !
Hindu Colony is a strictly residential colony, except for some professional practices that are allowed to operate, due to their strictly personal occupation. These include offices like Doctors clinics, Architects, and such professional practitioners. Over the years, as market prices zoomed higher, the colony began to command a hot price in real estate circles. These were attributed to the following features,
The existing FSI (or Floor Space Index, a ratio of the total developable land to the total area of the plot) was fixed to 1.0 for the past 20 years. Recently, the State Government came up with proposals encouraging building activity through its amendment acts where by, if the old buildings were demolished, and new buildings were erected in their place, the developable FSI would be increased to 2.0 (increase of 100%) in Greater Mumbai. Also, old buildings were additionally provided an FSI of 1.33 (increase of 33%), by allowing them to put additional floors on top of the existing buildings (if not demolished). This lead to many private property owners who were approached by developers with high-return proposals to demolish their existing buildings and replace them with new and modern residential ones.
Around 1996, we thought of developing our own premises. We decided to go for the option of adding more floors to the existing building, using thick and wide external concrete columns and beams, so that none of the load of the new structure was passed on to the old structure below. In this case the FSI available was 33% more of the existing land and this was a pretty worthwhile incentive to go ahead with the idea. However we were not in the favor of demolishing the existing structure of selling the additional developable rights to other developers for five primary reasons.
Against all these disadvantages were some other advantages, if the entire development was handed over to a private developer. These included,
To preserve our ownership of the property rights, we decided to carry out the development on our own ! We had to borrow a substantial loan of money from a private bank to undertake the construction purposes at a high market interest rate of 21 % per year. The construction, due to circumstances beyond our control took more time, about 2 years to complete.
Unfortunately for us, in these two years the real estate market snow-dived. Our original idea was to construct the additional floors and give part of them for lease to private parties over a decided deposit (for the surety of the apartment, so that we could recover the cost of construction and repay the loan that we took from the bank. However, since the real estate market crashed, there were no potential buyers to take the apartments at our price. This state continued for some time (even as interest accumulated), and we had to seriously consider our expectations. We were forced to consider negotiations (providing incentives) as the only way out in attracting more proposals.
Meanwhile many estate brokers (could be referred as estate mediators) visited us in truckloads while no progress was made in leasing the apartments. We were bombarded by numerous offers from private parties to outright purchase the apartments at our price (but this was what we never wanted to do, since this would have taken all our property rights from us (as mentioned earlier). In a way these proposals were our BATNA (Best Alternative to Negotiated Agreement) in the event that none of the private parties came forward to take the apartments on lease as we would have wished them to. Though BATNA generally describes a no-deal, for us, this lay in the unfortunate deal of selling of our property (the worst condition). Though, this BATNA would have enabled us to repay all our debts to the bank and also pay for some of the outstanding dues with the workers and contractors of construction. The psychological pressure was hard enough to seriously consider any proposal that came out to us first.
After about 3 or 4 more months (interest accumulating), we came across a proposal with one of the brokers (mediators) bringing in a family that was interested in leasing one of our apartment. Some of the incentives that brought them to us, and which we managed to procure from the broker were,
The only main problem where the negotiation got stuck was the fact that they wanted more fixtures and furniture in the apartment that would be provided by us. They were willing to pay a good leasing deposit that would have enabled us to pay-off our debts and loans so this was a proposal that we didnt really wanted to miss out on. Waiting for another proposal would have cost us more time and more running interest. The psychological dilemma was another question. Though it was also in our strategy in this type of negotiation not to let the other party know about our constraints. However, they did get to know that we had some dues and loans to repay, but we kept insisting that we were also getting a lot of other offers to choose from.
Our main problem in providing additional furniture in the apartments was that, after the end of the lease, if they had to leave the apartment, we would have got stuck with the furniture, now old and used and no new lessee would have agreed to accept them. Another unacceptable proposal was that the entire cost of providing furniture would have been borne by us. The furniture (woodwork) was substantial and would have cost us a great deal.
Additionally, they were asking for a longer duration of the lease period (6 years), when the normal system is for 3 years. We were really not in favor of a long lease, as we would have been tied to the lessee. Also in the future, we were thinking of taking the apartments for our own personal use (once the family expanded, and my brother and I needed separate apartments).
In this negotiation, the role of the mediator (broker) here was restricted to getting the communication link between the parties going. The negotiator in this case wasnt really able to come up with a meaningful proposal. Though it was helpful on the part of the mediator to keep the negotiations going on, as there were significant monetary gains for him to make the deal come through. The mediator was entitled to a cut of 2 % and 2 months rent of the lease deal. So it was also in his interest to keep the surety amount as high as possible (just as being reasonable for striving for a deal to get through). The negotiations took a toll of our days and personal anxieties, not to mention the daily interest. I would like to point out that at all times, both the parties showed enough commitment to go ahead with the deal. Finally with repeated discussions that were carried out in friendly environment, we mutually agreed upon the final deal;
We agreed to lease our apartment to the family in turn for a deposit that was a little less than the one that was initially made known to us in the agreement that they were solely responsible for providing their own furniture. We agreed to prove the basic furniture that consisted of standard light and ceiling fixtures. At the end of the lease period, either party was free to decide whether to go ahead for another extension or to terminate the agreement. At the end of the extension period, a new agreement would have to be signed, if both parties wanted to continue with the agreement.
This deal was beneficial to us in many ways. Even though we managed to get less funds than the expected amount, we were pretty much satisfied at not being left out with the BATNA that at one point seemed to be the only way out. We managed to keep the property with the family and were able to protect our other interests. Another important aspect of the negotiation was the measure of time. We learnt that negotiations are not struck in days, sometimes they take months and possibly years to arrive at ! We were able to preserve our relations through the deal (there were occasions when one of us thought that the other partys proposal was being unreasonable).
The other party too benefited from this negotiation. They were able to meet their expectations as well.