Freehold Purchase

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    Freehold Purchase

    I have a leasehold flat value say £500K and wish to purchase the freehold. Term remaining is105 yr of a 125 yr lease. Ground rent: 5 yr left at £150 pa - then 25yr at £300 - 25yr at £600 - 25yr at £1200 and final 25yr at £2400. Would any member help me with a suitable formula for calculating both the value of the ground rent and the reversionary value? What capitalisation rates and Deferment rate would I expect to use? Is a Capitalisation rate of 6% and Deferment rate of 5% a reasonable rate to use?

    #2
    I take it that it is a statutory lease extension which will cancel out your ground rent that you are referring to as you cannot buy the freehold of a leasehold flat. Try the ready reckoner on My Leasehold. It does not account for a rising ground rent though:


    How much is your lease extension going to cost? For a fast, simple way to find out what it might be worth - try our new lease extension calculator.

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      #3
      You may find this website has some advice on lease extension but its not up to date :

      https://www.moneysavingexpert.com/mo...end-your-lease

      Comment


        #4
        Thank you Lorimer for your comment. I should have made it clear that I am one of a number of flat owners involved in the purchase and the actual freehold will be owned by a company in which we will all share, we will "own" the freehold indirectly.

        Comment


          #5
          if the leaseholders contribute to a share in the company which will own the freehold title, then after completion of the purchase , every participating leaseholder should be able to extend their existing lease to 999 years at peppercorn ground rent at no cost for the extension . .

          Comment


            #6
            There are just THREE variables in the valuation.Firstly the capitalisation rate which can be between 5.75% to 6.25% Secondly a deferment rate which for a £0.5 m flat will for almost certain be 5% and finally the value of your flat which you advise is £0.5m

            If the income is discounted at 6% then the cost for your flat will be £5750 plus 0.6% of the value of your flat or £3000 a total of £8750

            if the capitalisation rate moves by 0.25% then the cost moves by around £400. Lower cap rate increase the value and visa versa

            You will if you go down a statutory route have to pay the landlords valuation fee and certain aspects of their legal costs - allow around £1750 plus your own costs. If you do a collective enfranchisment the value of the freehold will be the sum of the individual lease ext )unless here are non participators with sub 80 year leases )then the landlords costs will be less per flat.


            Comment


              #7
              Many thanks for your clear and very helpful post. My starting point has been to use a cap rate of 6% and a deferment rate of 5%. Your post has given an assurance that I am not way out and that the calculation method I have been using is valid.

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                #8
                I now have to convince a Tribunal that a Deferment rate of 5% and a Capitalisation rate of 6% should be applied to the flats. Is it safe to assume that the Tribunal will come to that conclusion on its own or will I need "Expert" evidence? Is it usual to have oral or written evidence? Can anybody suggest anybody that will give such evidence in the London area?

                Comment


                  #9
                  Mindful that the freeholder will have to pay his own costs at the FTT or represent himself and mindful that the figures are (without wishing to sound arrogant) correct I strongly suspect the freeholder will agree to your figures. How many flats are taking part in the enfranchisement - if there is a fair number then it might be worth having a surveyor represent you.

                  Comment


                    #10
                    Thank you sgclacy for your post. Just over 70 flats are involved in the enfranchisement. The freeholder has shown no sign of reaching an agreement on the proposal of a 5% Def rate and a 6% Cap rate or even rates near to those proposed.

                    Comment


                      #11
                      The result of this case for property located in Essex : 5% Def and 6.5% Cap rate.

                      https://decisions.lease-advice.org//...-5000/4550.pdf

                      Comment


                        #12
                        The case that Gordon999 has highlighted confirms that a deferment rate of 5% is used in all but a handful cases

                        The capitalisation of the rent appears to be that if a small rent and 6.5% is quite common larger rents because the collection costs are he same are more efficient and attract rates of sub 6% in an era where base interest are so pitifully low

                        Comment


                          #13
                          Thank you Gordon999 for producing a copy of the 2017 decision. Reading an actual case is always useful. Regarding sgclacy's helpful comment about the capitalisation rate, the ground rent in my case would be for about 100 flats, so economies of scale in respect of collection, would apply. On the other hand, my ground rent is payable quarterly, increase the cost of collection. I am wondering if quarterly ground rents attract different capitalisation rates to annually collected ground rents.
                          I still have the remaining problem of appointing a valuer to be at the hearing. I don't wish to just pick one at random. The valuer I engaged, prior to the section 13 notice, for a full valuation report, turn out to be not as good as anticipated (understatement), so they will not be used.

                          Comment


                            #14
                            You should claim the cap rate most favourable to you .

                            Here is an example for lease extension in Croydon area with def rate 5% and cap rate at 7%.


                            https://decisions.lease-advice.org//...-5000/4449.pdf

                            Comment


                              #15
                              A landlord may decide that rather than demand 4 times a year he can demand twice yearly,, he loses the cash flow advantage but saves on cost

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