The Overlooked Jargons in Commercial Real Estate That Squeeze Investor Margins

When investing in commercial real estate, it’s easy to focus on the big-picture aspects like location, rental income, and property appreciation. However, some seemingly minor terms in real estate contracts and agreements can have a significant impact on profitability. Investors often underestimate these elements, and by the time they realize their importance, profits shrink.

Here, I’ll walk you through a few common industry jargons that are overlooked and explain—using real-life examples—how they affect returns.

1. CAM (Common Area Maintenance) Charges

What it is: CAM fees cover the upkeep of common spaces, like lobbies, parking, and lifts, which tenants share.

Why Investors Ignore It: Investors might believe CAM will only slightly affect tenants, but high CAM charges can make it harder to lease out spaces. Prospective tenants may back out, leading to longer vacancy periods.

Impact Example: In some prime IT parks, CAM charges can be as high as ?12-15 per sq ft monthly. If your lease was projected at ?55 per sq ft, but the tenant factors in these costs and negotiates a discount, your margins are squeezed further.

2. Fit-Out Periods and Rent Holidays

What it is: Many commercial leases offer a rent-free period (typically 3-6 months) to tenants for setting up interiors or fit-outs.

Why Investors Overlook It: While this sounds like a goodwill gesture, it delays rental cash flow. An investor who needs rental income to cover a loan’s EMI may find themselves in a tight spot during this period.

Example: Let’s say you lease a property at ?60 per sq ft for 5 years. If the first 6 months are rent-free, your actual return reduces, and your total income for the first year drops by nearly 10%.

3. Escalation Clauses

What it is: These clauses specify incremental rent increases over time, generally every 1-3 years.

Why It's Underestimated: Many investors assume that escalation clauses automatically protect their income against inflation. However, if the escalation is capped at 5%, but inflation rises by 7-8%, real income erodes.

Impact Example: A retail investor in Gurgaon’s commercial hub leased out space at ?100 per sq ft with a 5% yearly escalation. But inflation touched 8%, making the return effectively negative in real terms.

4. Lock-In Period vs Lease Tenure

What it is: The lock-in period guarantees that the tenant can’t vacate the property during a specific period without paying penalties. However, this is different from the total lease tenure, which spans several years.

How it Affects Profit: Investors assume tenants will stay throughout the lease tenure. But if the lock-in period is only 2 years in a 9-year lease, the tenant can leave, leaving the owner scrambling for a new tenant. This leads to unplanned vacancy and brokerage costs.

5. Super Built-Up Area vs Carpet Area Confusion

What it is: The super built-up area includes common areas like corridors and staircases, while carpet area refers to the actual usable space.

Why It’s Ignored: Investors may quote rents based on super built-up areas without realizing that tenants pay attention to carpet area. This misalignment causes rent negotiations that lower the effective income.

Example: If an investor prices rent at ?80 per sq ft based on 10,000 sq ft (super built-up), but the tenant recognizes only 7,500 sq ft (carpet area), the real rent becomes closer to ?60 per sq ft.

6. PLC (Preferential Location Charges)

What it is: PLC refers to additional fees for properties in preferred locations (corner plots, upper floors, etc.).

Impact: Investors often ignore the impact of PLC on resale value. If nearby developments reduce the location's premium (e.g., traffic congestion or new competition), PLC advantages may evaporate, diminishing resale value.

Final Thoughts: Every Term Matters

When you dive into commercial real estate investments, every detail in the agreement counts. Ignoring these terms can silently eat into your profits and lead to unanticipated costs.

At Studio Khozi, we emphasize reviewing every aspect of the deal—not just the rent and price. Ensuring that you don’t miss these hidden traps is critical to maximizing your returns. Always get your agreements reviewed by a real estate professional before signing anything.

By Sudhir Khatana , CRE Consultant, Studio Khozi