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Sunday, February 17, 2013

Multiplex leasing in India for Dummies- Facts, leasing techniques and a proposal checklist

Multiplex India leasing for dummies
Multiplexes are about convenience and experience. Plan well!
Certain people in the office have been busy lately, for a change. There seems to be some running around happening to help lease out a 3 Screen multiplex, sitting across the 6th and 7th floor levels of a retail hub in one of the state capitals of Eastern India.

Multiplex leasing in India is one of the lesser known, explored and talked about things. Each city, apart from the metros in India would have between one and two multiplexes operating. There are a handful of brands that come to mind when one thinks of multiplex chains in India. Apart from the large national level players, there are also a few local multiplex chains that have been operating and expanding regionally.

At Indian Real Estate for Dummies, we racked our heads, used some first hand learning to create and share this post about Multiplexes in India.

Some cool Multiplex Facts, India
- There are positive future predictions and growth paths ahead for multiplexes. All of this explosive growth is based on you and me, buying tickets to go and see that film. You and me buying tickets depends on whether the movie is good enough for that spend. (We have, ahem, people at our office hogging broadband bandwidth, downloading movies from torrent sites, saving the dough for only the best movies!) Growth of the multiplexes depends on content. And that is something neither the multiplex operator or the mall owner can control. Risk exists.

- Going by the balance sheets, a good chunk of the profits earned by big multiplex chains is through F&B sales and Advertisements/ Promotion activities at the theatres. NOT just movie ticket sales

- Here are some ballpark figures. For every Rupees 100 ticket, 20 bucks goes out as entertainment tax. Of the Rupees 80 remaining, 36 bucks is handed out to the film's distributor. The multiplex operator is left with 44 bucks to run the establishment, take care of property rent, operating costs, maintenance and other things.

- In 2011, multiplexes accounted for 65% of total ticket sales of the top 50 Hindi film releases

- Over the years, multiplex chains operating in India have stopped looking at stand alone properties and single screens. The action is in the malls. So that is where your focus, as a leasing agent should be! Multiplexes in India today are an integral part of malls.

- India is number 1 globally in film production volume with over 1000 films produced annually and also number 1 in ticket sales with over 3 billion tickets sold in 2011

- India has 10 screens per million people, while the United States has 120 screens per million people. There is a theoretic assured growth of screens in India going by that ratio

- On an average, the cost for setting up each screen in India is roughly Rupees 2 Crores! For a standard 3 screen multiplex, a Rupees 6 Crore investment is needed before you show your first flick. This is certainly a high capital deployment industry and expansion comes with a substantial start up cost attached

- Apart from a few established malls in prime locations in India, the system of security deposits and rentals has collapsed. When the 'gun run' began, each of the multiplexes were projected to become pivots of the city's entertainment system, churning out massive returns on investments. Today, some of them are unable to pay committed rents. (Wonder who makes these projections and plans??? - Kaushik)

- Revenue sharing is the norm today when it comes to multiplex leasing. To reduce start up costs and ensure long term sustenance, multiplex chains seem to be telling the mall developer that profits, if any, can be shared. "If you are confident about your location, if your mall is going to walk the talk, you can look at a 10% to 15% share from the total multiplex revenues.", says the multiplex operator we are trying to fit into a mall lately. "There are no minimum guarantees of rent. The money people think we make from selling tickets is not there in reality. There is very little meat on the bone left at the end of the day", adds the multiplex operating company's MD.

Proposing a Multiplex chain to set up shop at your mall (For the broker/ builder)

If you are building a mall in India, ensure that you have a provision for a multiplex. Today, that is an integral part of a successful mall. Once your multiplex space is leased out, anchor and vanilla retailers could end up paying you up to 20% premium on rent, depending on the multiplex chain you have signed for the property!

Trailing below is a basic checklist of things to include in your proposal. Remember that there are only a few large multiplex chains in India and they are flooded with proposals from various corners of the country. Your proposal shall be competing with many of them. Ensuring that your proposal is meaningful and covers important factors goes a long way to make it the successful proposal. :)

Multiplex Leasing Proposal Checklist
Here is a list of questions that you, as a mall developer or broker will have to answer before you have a multiplex brand in your mall in India. It makes sense to have an internal meeting with your lawyer and stakeholders to have those answers figured out. If you know your expectations and bottom line, the deal structure and process become easier.

Breaking the ice
- A city multiplex synopsis. Brands and number of screens present. Average occupancy rate and average ticket size for your city(This is no big deal. Just meet the existing multiplex manager in your city and ask her/ him politely. You will get ballpark figures)
- Total number of screens you are building
- Total number of seats you are planning to build per screen
- Total Carpet/ Built up area - this should include the auditoriums, common lobbies, toilets, F&B Areas, Box Offices, Projection Rooms, AHU Rooms, maintenance, service areas and all other relevant areas. Include legible building drawings in the proposal covering all the components of the area you are dedicating for multiplex use
TIP: It makes sense to keep the lobbies and entrance foyers right sized. For a multiplex, 10,000 sq ft of grand lobby area may be a waste of space and you may not have a deal because of that extra space cost burden your design is putting on the operator!
- Total Chargeable Area - Add the standard acceptable loading percentage. (20% is a good figure we think)

General Terms
- Proposed business term in years. Clearly mention what you think is viable. Renewal conditions should be mentioned by you here.
- Lock in period
- Type of agreement based on the local trend, state laws and systems preferred by the multiplex chain you are proposing to
- Construction approvals, operating licenses and other statutory approvals for operating a multiplex at your mall should be obtained by you and this should be clearly mentioned in this part of the proposal. Keep this section clean, detailed and crisp. Operational license to be secured by the multiplex operator should be mentioned here as well
- Permitted use. Use this section to permit the use of the space for screening of movies and matches, F&B and Concessions, advertisements, promotions and other movie related sales only. Keep the scope tight and relevant to multiplex operations
- Profit sharing commencement date
- Parking details
- A note on dispute resolution and exits
- A note on your desired jurisdiction

Detailed Scopes of Work
- A comprehensive note on mall developer's scope of work. Think fit and finishes, fire fighting systems, high side and low side AC, power, power back up, toilets, relevant infrastructure etc.
- A similar comprehensive note on the multiplex operator's scope of work. Think auditorium fit outs, sound, projection systems, interiors, F&B areas, low side AC etc.
- Dates and processes for commencing fit outs, dry runs, tests and final commercial operations should be inserted here

Commercials
- Monthly Rent is passe and in all probabilities, you are looking at a revenue sharing option here. Be creative and confident if you think that your mall has an edge. Remember that you, as a builder will be paid only when the multiplex makes money. That is the only fact. The rest is wishful thinking.
Example of a Revenue Share Proposal: The Revenue Share will be calculated on the basis of a slab. The RS will be 10 (ten) % of net revenue from box office if there is an occupancy of 30 (thirty) %, 12.5 (twelve point five) % of net revenue from box office if there is an occupancy of 50 (fifty) % and 15 (fifteen) % of net revenue from box office if there is an occupancy of 70 (seventy) % and above. 
- Method of computation of the Revenue Share. Get this straight and be on the same page as the multiplex operator!
- Payment terms and method of the revenue share. Remember to insert an interest clause for delayed payments from the multiplex operator
- Common Area Maintenance
- HVAC/ Power/ Power back up and Utility Charges
- Interest free refundable security deposit
- Stamp duties, registration and other required legal charges
- Property and Municipal Taxes. Mention these, irrespective of who is bearing the same. If you are, just flaunt it. ;)
- Entertainment tax exemptions, roll back and other mechanisms prevalent in your state. All other relevant sales and service taxes
- Signage. Think size and location
- Also include things like insurance and other important factors that your internal team suggests

Addressing these points in your proposal should keep you ahead of the curve as a broker/ mall developer when you make your foray into setting up a multiplex at your mall. Please treat this article strictly as a general guideline only and not as legal advice. Consult your lawyer before you send out a document like this to any third party.

Cover these concerns and you could have a quick, easy closure and a long term relationship with that multiplex brand. You will need it, for your mall to thrive and make money!

If you need more help with multiplex leasing, feel free to write to Kaushik at Pillars Consultancy. He will be glad to assist you.

Click to discuss this Article at the IREFD Forum 

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