Fair Rent Valuation

(Key Words: Fair Rent as per the Tamil Nadu Rent Control Act, Fair Rent Valuation of a residential building, valuation of multi-storey building, Fair Rent Formula vs. DCR (Development Control Rules) parameters behavior analysis, and future recommended amenities in fair rent are discussed) 

Fair Rent is a rent which is fair between landlord and tenant and subject to prevailing rent law of a locality, enacted by a legislative body of the State concerned or Central Government. 

Tamil Nadu Rent Act is “Tamil Nadu Buildings (Lease and Rent Control) Act 1960 & as amended by Act 23 of 1973 and Act 1 of 1980(TN RENT ACT). As per TN Rent Act Section 4, fair rent is calculated in the following manner: For residential building, fair rent is nine percent gross return per annum on the total cost of such building and for non-residential buildings, fair rent is twelve percent gross return per annum on the total cost of such building. 

Total Cost of building is market value of the site in which the building is constructed, the cost of construction of the building and the cost of provision of anyone or more of the amenities specified in Schedule I as on the date of application for fixation of fair rent. Amenities are fifteen percent for residential buildings and 25 percent for non-residential buildings on the total cost of such building. http://www.lawsofindia.org/pdf/tamil_nadu/1960/1960TN18.pdf

Amenities in the Building SCHEDULE-I (Section 4 Schedules – I of TN, Rent Act).

SCHEDULE – II (See Section 4) RATE OF DEPRECIATION 

Depreciation formula: The actual depreciation of a building aged “n” years is calculated by using the formula: P = A (100-r)/100) n

Where A = total cost of construction of building, r = Rate of depreciation per annum, n = Age of the building and P = the final depreciated value of the building. The amount of depreciation will be equal to (A-P) subject to a minimum to ten percent of “A”.

The land extent to be considered is that portion on which building is constructed (Building footprint area/BFPA) and fifty percent of BFPA, which is equivalent 1.5 BFPA. The excess land is to be treated as one of amenities mentioned in the Schedule I of the Act. Where the land extent is within 1.5 BFPA, full land extent is allowed for assessing to market value. BFPA is Building footprint area that is plot coverage percentage allowed in the ground floor; that area on which building is allowed; the remaining area is for front, rear and side setbacks. Total plot area minus plot coverage area is theoretically vacant land, which is common to all.

e.g. land extent is 13,000 sf (sq.ft), plot coverage (BFPA) is 30 percent is  3,900 sf and 1.5 BFPA is 5,850 sf, which is the land area allowed for assessment and the balance area 7,150 sf is treated as amenity. The un-built area is 9,100 sf (13,000 - 3,900), which is supposed to be common to all.

e.g. Land extent 675 sf, plot coverage 75 percent is 506 sf and 1.5 BFPA is 759 sf and land extent 675 sf is less than 1.5 BFPA, therefore, full land extent of 675 sf is allowed for valuation.

Fair Rent for multi-storey buildings: In the case of a building having more than one floor, the principle ought to be of one of apportionment in accordance with the number of storeys. If there are two or more storeys, the market value of the land for the first floor will be half. If there are more than two storeys it will be proportionately distributed in accordance with the number of storeys in the buildings (A.C. Charities Vs. Sadhana Aushadalaya 1968 (2) MLJ 406). 

In the case of a flat to fix the fair rent, the court should take into account the total cost of building, including staircase and then decide it by number of flats if the flats are identical. The land around the building will be treated as common to all tenants and then fair rent to be fixed, (Banu & another Vs. P.Venkateswaran 100 LW 389). 

Fair Rent Valuation: A G+2 residential building in West Manbalam abutting Old Mambalam Road. The plot extent is 675 sf and total built-up area is 1,850 sf. The building is in a continuous building area and the building footprint area is 675 sq ft. Age of building is about 25 years old. Ground floor has madras terrace roof and upper floors are roofed with R.C.C. Walls are bricks in cement mortar. Joineries are of teakwood. Amenities are mosaic flooring, side dados, and over-head tank for water supply, electric motor and pump for water supply, sun-breakers and features of special architectural interest. Valuation is as on February 2013. 

Fair Rent Valuation: 

Guideline value of land is INR. 6,000 per sf (psf) and no excess land are available.

FSI value of land per one sq ft (psf) of built-up area: 675/1,850 x INR. 6,000 = INR. 2,189 Say “L”

Total cost of construction of building “A” psf: INR. 1,300

The final depreciated value of the building “P”: A (100-1/100) ^25: A x 0.99^25

INR. 1,300 x 0.78 = INR. 1,014. Say “P” 

Summary of Valuation 

Note: Judicial pronouncements have permitted adopting market value of land prevailing in the locality and Madras PWD rates for estimation purpose published by the Chief Engineer General of Madras PWD. The author in the above valuation has considered the prevailing guideline value of registration department, which is in the opinion of the author is proximate to market value; further, amenities of 15 percent is added to the depreciated reproduction cost, as there is no excess land is available to the building. 

The following valuation is for a multi-storey building (MSB) in Chennai in MSB areas. Land extent, Plot coverage, Floor Space Index (FSI), etc. as per Chennai SMP (Second Master Plan) Building Rules are considered. Prevailing (GLV) guideline value (2013) and construction cost psf is considered. Minimum depreciation of ten percent is allowed. A comparative study has been done to see how fair rent fares with FSI and plot coverage parameters and market rent. (FSI is floor space index, which is total built-up area divided by total land area).

MSB Category I (a): 

Land extent: 13,000 sf; FSI: 1.5; Plot coverage: 30 percent; GLV: INR. 20,000

BFPA: 3,900 sf; Land area adopted: 5,850 sf; Non-BFPA land: 9,100 sf.

Excess land: 7,150 sf

Non-residential use

Guideline value of land is INR. 20,000 psf.

FSI value of land psf of built-up area: 5,850/13,000 x 1/1.5 x 20,000: 6,000 Say “L”

Total cost of construction of building “A” ground floor psf: INR. 2,700

The final depreciated value of the building “P”: A x 0.90 (Minimum Depreciation of ten percent)

Rs. 2,700 x 0.90 = INR, 2,430. Say “P” 

Summary of Valuation 

Like MSB Category I (a), the below analysis is worked out and the summary is shown for Category I (b), Cat II & Cat III:

Height allowed for Cat I (b): G+8. Maximum 100 feet, subject to satisfy 1.75 FSI 

Category II MSB:  Construction Cost @ Rupee 3,000/sq. ft. complete. Maximum height allowed is 200 feet subject to satisfy respective FSIs. 

The property owner when opted for 2.50 FSI, she/he can avail premium FSI of 0.5 FSI and Transferable Development Rights (TDR) of 1.0 FSI on payment of such amount and abiding such conditions as prescribed by Chennai Metropolitan Development Authority (CMDA); thus, the property owner can avail up to 4.0 FSI/ In such a situation, Residential rent would be Rupee 43 psf and non-residential rent would be Rupee 62 psf.. 

Category III MSB

Maximum height allowed is >200 feet subject to satisfy respective FSIs. 

The property owner when opted for 2.50 FSI, she/he can avail premium FSI of 0.5 FSI and Transferable Development Rights (TDR) of 1.0 FSI on payment of such amount and abiding such conditions as prescribed by CMDA; thus, the property owner can avail up to 4.0 FSI/ In such a situation, Residential rent would be Rupee 43 psf and non-residential rent would be Rupee 62 psf. 

Above valued subject property (MSB Cat II & III) is in Mount Road (Anna Saalai Nandanam Signal to Gemini Flyover Belt), Chennai. The average fair rent of non-residential (Office and retail) works out to INR 102 psfm and corresponding residential rent is INR 70 psfm. Capital value for non-residential building ranges from INR 17,000 psf onwards to facilitate amenities like central air-conditioning, fire-alarm & security systems, visitors parking, service lift, marble/granite flooring, etc. Residential rental market includes features like Balcony, Private terrace, Garbage chute, car parking, Gym, central air-conditioning, fire- alarm & security system, etc. Market office rent (Based on market enquiry) varies from INR 110 psfpm and retail @ INR 130 psfpm onwards in that locality. 

Author: A.Mohammed Ibrahim

Architect