How lease premium calculated?

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  • Local Enterprise
    started a topic How lease premium calculated?

    How lease premium calculated?

    How is the lease premium is calculated?
    For example
    Rental Market £10000 per year
    Ground Lease £50 per year
    Lease term 98 years
    How would you determine the lease premium?

  • rentreviewspecialist
    replied
    A premium is the capital value of the profit rent. Using your example, assuming the 'rental market' is £10,000 pa for the whole of the lease term 98 years, the profit rent is £9,950 pa. The capital value is calculated on the yield that would be considered appropriate for the type of property, physical characteristics, terms and conditions of lease, etc. 98 years might be considered akin to freehold so if for example the appropriate yield were 10% then the premium would be £99,500, However, as it is a lease that amount of premium might not hold after about 28 years (all other factors remaining constant) because once a lease has >70 years unexpired it can start to become less valuable.

    Generally thinking premium would be better suited to a short lease. For example, the passing rent is £10,000 pa subject to review to market rent in 5 years' time. But the passing rent is too low because the market rent now is £15,000 pa. The premium value would be the capital value of £5000 pa for 5 years.

    The premium is for the benefit of the lease only, so goodwill is excluded, so too any tenant's fixtures and fittings. in some respect, the theoretical concept of a premium is outmoded. In places where demand for premises exceeds supply, buyers might pay a disproportionate amount simply to get in. Whether such buyers could recoup the amount paid when they themselves come to sell depends upon the state of the market at the time.

    It might also depend upon the source of finance. Generally, lenders want at least 7 years unexpired so a buyer having paid say £20,000 premium when the lease had 5 years remaining might not get their money back when the lease has only a couple of years left.

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