Calculating % yield on enfranchisement/lease extension

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    Calculating % yield on enfranchisement/lease extension

    I am in the process of extending the lease for a property in Richmond, Surrey. The freeholder has put in writing an offer to extend the lease to 150 years from the original date (1985) for 3.75% of the present market value of the flat, subject to me increasing the ground rent by £100 each 25 years (it's currently £50 and due to go up to £100 in 2009), paying any notice fees, their costs and my solicitor being responsible for all documentation. His previous offer, approximately a year ago, was 2.4% of the present market value of the flat. I am concerned at the steep increase in the offer.

    The property in question is worth c.£250k, which would put the price at £9,375 plus all the costs above.

    I would like to be sure that I'm getting a good price, and have been trying to calculate the amount to be paid for the new lease in according with the 1993 Leasehold Reform Act according to the three variables:

    1. The diminution in the value of the landlord's interest in the flat; that is, the difference between the value of his interest now with the present lease and the value of his interest after the grant of the new lease with the extra 90 years.
    2. The landlord's share of the marriage value
    3. Compensation for loss arising from the grant of the new lease.

    In order to calculate the Term, I need to understand what the Yield Rate Percentage is. Does anyone know how I can find out what the Yield Rate Percentage is for Richmond in Surrey?

    Any advice would be gratefully received.

    #2
    Firstly to CAPITALISE the ground rent I would suggest a rate of 7.5%. Unless the rent increase in the lease are very large simply times the ground rent by 15.

    Secondly The deferement rate. This is at the moment fairly liklely to be 5% following Cadogan and Sportilli. Determine what your flat would be worth with a 90 year lease and take 2.4% of that value

    Thirdly with that value for the flat with a long lease and peppercorn rent take 96% of that value (called relativity) to determine the marriage value. From The difference between the 96% figure and the full figure deduct the figures in step 1 and step 2. If there is a positive figure take 50% of that figure.

    The cost of a lease extentsion with a 90 year increase and a peppercorn rent will be the sum of all three steps.

    The figuers he has offered I suspect are about right. The £100 per annum ground rent would represent more than what you would have to pay if you went under the ACt. The cost of going under the Act time and agro would far outweigh the advantages of getting rid of a new rent of £100 per annum. Also the £100 per annum will in effect be paid by your sucessors in title and unless if adversley effects the value of the flat (which it wont) go for it!!

    I think the Landlords being quite reasonable he gains a little more by offering a near correct figure for a lease extentsion


    Hope this helps

    Comment


      #3
      Lease Extension

      Thank you for your advice. Upon doing the calculations you suggested, it
      looks like the freeholder's method (straight 3.75% of the value of the flat)
      works out to be around 10% more.

      Whilst working on the calculations, I have also done some research in the
      area on the increase in value if I sell the flat with a 77 year lease as
      opposed to 100 year lease. The general consensus from 3 estate agents is
      that the difference in price would be c£10k, given market conditions.

      Using your calculations or the freeholders %, I would end up being out of
      pocket by extending the lease given that the value of the flat has
      increased. Could I use the matching prinicple and suggest to the freeholder
      that we cap the costs at £10k, including all fees stated in my original posting?

      Comment


        #4
        The mathemamtics of the formula for a lease extentsion is not anything like as difficult as some professionals would have you believe. HOWEVER the concept is not as straight forward as you think in relation to the difeerentila in value which are needed to arrive at the figure for marriage value

        In determining what a flat is worth with a long lease and a peppercorn rent and its current worth you have to assume that the values are arrived at in a “no act world”. Because of the existence of the Act this will give purchasers comfort that than can extend, therefore the figures you have found show that there is not a lot in it. But in the “no Act world “ which the legislation requires the valuation to be based on you have to assume that no such rights exist and therefore the differential in the two values will be greater.

        For the purposes of the valuation formula a fairly accurate rule of thumb is that relativity is 1% off from 100% for every year below 80 years subject to a minimum deduction of 3%. So a 79, 88 and 77 years lease would all have a 97% relativity and a 70 year lease a 90% relativity.

        His offer is a little on the high side but is not obscene by any standards. Offer to go formerly under the Act so he can rollover the capital gain. If you agree a figure then before you serve the Notice get an undertaking from him that he will not instruct surveyors. Remember that if an enfranchisement or lease extension notice is served the lessee becomes liable for the landlords valuation fee and legal costs in respect to certain items of work. I would imagine he knows what the true premium should be for the lease extension and also knows what the costs of surveyors and solicitors are and has pitched it so it is marginally worth you while going outside the Act.

        Alternatively offer him £7,500 and a revised ground rent of £200. The £200 will not effect the value of your £250k flat and in a sense the cost is passed on in future years to the next buyers of your flat.

        Comment


          #5
          Thank you very much for all your advice - it's allowed me to respond knowledgeably to the freeholder, along the lines you've suggested, and am now awaiting his response.
          Kind regards

          Comment


            #6
            Enfranchisement yield rate/calculation method

            [B]Hi, can anyone show me how to work out a 4.75% yield. Dont understand this. Have freehold of a block of flats - 4 flats in block - all with a lease of unexpired term of 67 years with £5 per annum ground rent and value of each flat currently £105,000 (£420,000)

            I understand everything except how to calculate the years purchase for 67 years at the % referred to - bearing in mind the case of Cadogan v Sportelli.

            Can anyone please enlighten me. I am trying to be fair to the tenants and thinking of offering 999 year term to them.

            Do I allow a 10% increase in value of the property?
            Any guidance gratefully received please. How does it change if only one or two of tenants want to buy the extended lease. At the moment the leases are unmortgagable due to the fact that the term is less than 70 years.
            Thanks in anticipation

            Comment


              #7
              Have tenants (lessees) already approached you, formally or informally, to:
              a. extend lease of each one individually; or
              b. sell entire f/r to them jointly?

              In any case, each lessee who has owned for > 2yrs. has a legal right to serve a Notice (s.42 of 1993 Act) to demand a 90-yr. leasehold extension. This right is lessee/flat-specific, so the one or two of the four can proceed without awaiting any action by the others.
              JEFFREY SHAW, solicitor [and Topic Expert], Nether Edge Law*
              1. Public advice is believed accurate, but I accept no legal responsibility except to direct-paying private clients.
              2. Telephone advice: see http://www.landlordzone.co.uk/forums/showthread.php?t=34638.
              3. For paid advice about conveyancing/leaseholds/L&T, contact me* and become a private client.
              4. *- Contact info: click on my name (blue-highlight link).

              Comment


                #8
                Originally posted by MISSHOPEFUL View Post
                [B]Hi, can anyone show me how to work out a 4.75% yield. Dont understand this. Have freehold of a block of flats - 4 flats in block - all with a lease of unexpired term of 67 years with £5 per annum ground rent and value of each flat currently £105,000 (£420,000)

                I understand everything except how to calculate the years purchase for 67 years at the % referred to - bearing in mind the case of Cadogan v Sportelli.

                Can anyone please enlighten me. I am trying to be fair to the tenants and thinking of offering 999 year term to them.

                Do I allow a 10% increase in value of the property?
                Any guidance gratefully received please. How does it change if only one or two of tenants want to buy the extended lease. At the moment the leases are unmortgagable due to the fact that the term is less than 70 years.
                Thanks in anticipation
                The value of £420,000 discounted back at 5% (4.75% was the rate suggested in Cadogan for Leasehold houses) is calculated as follows:-

                Take 5% divide by 100 and then add 1 to the result = 1.05

                Then take it to the 67 power = 26.28

                If you have microsoft excel the formula would be =round(1.05^67,5)

                67 being the years and 5 being the number of decimal places

                Comment


                  #9
                  Originally posted by sgclacy View Post
                  The value of £420,000 discounted back at 5% (4.75% was the rate suggested in Cadogan for Leasehold houses) is calculated as follows:-

                  Take 5% divide by 100 and then add 1 to the result = 1.05

                  Then take it to the 67 power = 26.28

                  If you have microsoft excel the formula would be =round(1.05^67,5)

                  67 being the years and 5 being the number of decimal places
                  thanks for that - looks so simple when you explain it that way.
                  I've used this calculator before http://www.easysurf.cc/vfpt2.htm#pva which seems to give the same answer.

                  Do you have a simple way of working out deferred ground rent? For example - I know, to work out £100 pa for 30 years at 7% would be multipled by 12.40904 (from this table or this calculator) - but what if I wanted that deferred for 7 years? How do you work out the deferrment multiplier?

                  Comment


                    #10
                    Originally posted by jeffrey View Post
                    Have tenants (lessees) already approached you, formally or informally, to:
                    a. extend lease of each one individually; or
                    b. sell entire f/r to them jointly?

                    In any case, each lessee who has owned for > 2yrs. has a legal right to serve a Notice (s.42 of 1993 Act) to demand a 90-yr. leasehold extension. This right is lessee/flat-specific, so the one or two of the four can proceed without awaiting any action by the others.
                    Yes, 2 have approached me directly (but verbally - although one of those has been trying for some years to extend and the previous freeholder ignored her).

                    I would like to rid myself of this burden by extending the leases of all flats but...... In any event they will come unstuck in the near future when they try to sell so want to be reasonable and extend.

                    I would appreciate any help in calculations advice etc. I actually said £3,500 each for a new long lease but not sure what timescale is long in their books - 125 years, 999 years??? Any help?

                    Thanks
                    Last edited by MISSHOPEFUL; 15-01-2008, 20:04 PM. Reason: not enough put

                    Comment


                      #11
                      Originally posted by MISSHOPEFUL View Post
                      Yes, 2 have approached me directly (but verbally - although one of those has been trying for some years to extend and the previous freeholder ignored her).

                      I would like to rid myself of this burden by extending the leases of all flats but...... In any event they will come unstuck in the near future when they try to sell so want to be reasonable and extend.

                      I would appreciate any help in calculations advice etc. I actually said £3,500 each for a new long lease but not sure what timescale is long in their books - 125 years, 999 years??? Any help?

                      Thanks
                      T's statutory right is to a ninety-year leasehold extension (ground rent reduced to a peppercorn). Alternatively, L and T can negotiate a non-statutory deal instead: any lease length that they agree.

                      The "extension" is not really that, in conveyancing practice. It is achieved by:
                      a. T surrendering old leasehold term back to L;
                      b. L granting new leasehold term to T (= old term + 90); and
                      c. both parts being incorporated in a single Deed of Surrender and Regrant.
                      JEFFREY SHAW, solicitor [and Topic Expert], Nether Edge Law*
                      1. Public advice is believed accurate, but I accept no legal responsibility except to direct-paying private clients.
                      2. Telephone advice: see http://www.landlordzone.co.uk/forums/showthread.php?t=34638.
                      3. For paid advice about conveyancing/leaseholds/L&T, contact me* and become a private client.
                      4. *- Contact info: click on my name (blue-highlight link).

                      Comment


                        #12
                        Originally posted by jeffrey View Post
                        T's statutory right is to a ninety-year leasehold extension (ground rent reduced to a peppercorn). Alternatively, L and T can negotiate a non-statutory deal instead: any lease length that they agree.

                        The "extension" is not really that, in conveyancing practice. It is achieved by:
                        a. T surrendering old leasehold term back to L;
                        b. L granting new leasehold term to T (= old term + 90); and
                        c. both parts being incorporated in a single Deed of Surrender and Regrant.

                        Thanks so much for that - this is an ace forum.
                        Finally
                        I understand most of it all now but can someone tell me how to calculate the CAPITALISATION OF GROUND RENT
                        The rent for all four flats is 5 per annum each so just £20 but dont understand this calculation.
                        The term left will be 65 years (as of July this year, so do I need to round it down to percentage?)
                        The current value of each flat is £105,000 - do I allow for potential increase at say 10% or anything like that

                        I would like to be able to produce my calculations and also the final proposed figures. As I said before I offered £3500 for each flatowner for a new 999 year lease but want to ensure I am right with this. I am unemployed so cannot afford to go for valuations etc. I know they pay legal fees

                        If I grant 999 years can I charge more?
                        Last edited by MISSHOPEFUL; 17-01-2008, 14:45 PM. Reason: More info needed

                        Comment


                          #13
                          1-{1.045^-65}/0.045 all x by annual groundrent This gives you todays value of the future rents capitalised at 4.5%
                          Shush this is a secret formula coveted by accountants... 'Present value of an Annuity'

                          NB '^' is the 'x' to the power 'y' button on a calculator

                          ie 20.95 x 20 =£419

                          Comment


                            #14
                            Originally posted by Markonee1 View Post
                            1-{1.045^-65}/0.045 all x by annual groundrent This gives you todays value of the future rents capitalised at 4.5%
                            Shush this is a secret formula coveted by accountants... 'Present value of an Annuity'

                            NB '^' is the 'x' to the power 'y' button on a calculator

                            ie 20.95 x 20 =£419
                            The formula for the capitilisation of a stream of ground rent income is unfortunately more complicated and there are additional complications when it rises in various steps. However microsoft excel has the main componets of the formula and needs only a few modifications to get the right result.

                            Those interested if they care to send me an e-mail I will send back the spreadsheet for the capitilisation of the income so you can put in various variables.

                            All I ask is that you agree to send me a cheque for £5.00 made payable to "Children in Need".

                            I am dissapointed that a couple of members on this site have been sent more detailed spreadsheets to help them get indicitive values for enfranchisement or lease extentsion and can not afford the courtsey of sending me the donation.

                            Comment


                              #15
                              [QUOTE=sgclacy;60796]All I ask is that you agree to send me a cheque for £5.00 made payable to "Children in Need".

                              QUOTE]


                              I would happily do this but will I understand it all. I have Excel and found that formula but just dont understand it all. So just not sure.

                              Comment

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