[SOLVED] Leasehold property

Leasehold property
Leasehold valuations
Lessee interest
Lessor interest

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Valuation methodology
Bundle of Rights Theory
Property ownership can be likened to a bundle of sticks with each stick representing a separate right of ownership
Solving a valuation problem requires knowing how large or small the bundle of sticks is!
A combination of regulations and statutory restrictions limit unrestricted use and ownership

Leasehold interests
Lease contracts can create separately saleable interests
Long term leases without regular rent reviews are likely to create separately saleable interests
Share or interest in a property less than full fee simple ownership
Leasehold interest
Give less control of the realty
Usually difficult to sell
Usually sell at a discount to the fee simple interest

Lessees interest
What creates lessee saleable interest?
Contract rent less than market rent
Obtain value through ongoing right to occupy
Value of lessee improvements
The lessee is running a business, which is analogous to a sale and lease back of land arrangement.
For residential leasehold homeowners, what they are buying?
Lessors interest
What creates lessor saleable interest?
Right to receive rent
Right of reversion on lease expiry
Right to resell or release
The lessor is buying an investment

Leasehold interest
What is the market value?
Factors to be investigated and considered:
Type of property
Lease documents
Size into which it is separated
Can it be sold
Market sales evidence
Statutory valuation, case law precedent?
Leasehold interest valuations
Mathematical approaches
Sales analysis
Discounted cash flow
Leasehold creates additional risk
Reference: Ground lease valuation and Analysis,
M Namara, 2020
https://static1.squarespace.com/static/5c6b7b35e8ba449a332dd7db/t/5e44518607ae 104424e40085/1581535685299/Ground+Lease+Valuation+and+Analysis+Jan+20.pdf

Valuing the benefit of the right of renewal
Way to analyse sales: Sale Price less
1. Improvements
2. Benefit rent
3. Leaving a lump sum which represents the right of renewal/other benefits if any. In some cases this can be nothing.
4. This lump sum is then divided into the freehold land value to show a percentage.
Lessees interest
Benefit from rent
Current market rent $77,000 @ 6.2% pa
Less existing rent Lessees annual benefit PV for 3 yrs @ 10.5%
$4,774 $ 878 $3,896 $9,604

Sale price
Ground rent paid under lease now
Ground rent %
Current land value
Current ground rent as if reviewed (c x d)
Benefit rent (e b)
Paid in advance every 1/2 year
Length to run (yrs)
Payment semi annually in advance
Total payments (i x h)
Investors required return
PV of annuity (l x g)
Improvements
As a % of land value
Valuing the benefit rental
Fee simple land value: 200,000
Ground rental @ 6%
Current land rental
Benefit rent therefore
We use the formula 1-(1 + i) n
i i = interest rate
n = number of periods
$12,000 $8,000 $4,000

Valuing the benefit rental
Years to run = 3
Interest rate = 10.5%
1-(1 + .105)^ 3 = 2.4651 .105
2.4651 x $4,000 = $9860.49
Lessors + Lessees interest = Freehold interest?
Not necessarily
Subject to different market influences
Depends on the lease
Need to be assessed independently
Should not subtract one from the freehold value to derive the other

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