Approx valuation model for lease ext

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    Approx valuation model for lease ext

    I am aware that a number of members are seeking estimates for the cost of lease extension/ purchase of the freehold. Therefore I am posting TWO threads, one that provides a rough and ready simple calculation and another which provides a more precise calculation.

    The first therefore gives an indication of the sort of money you may be looking at. If you then start negotiations yourself with your freeholder and his offer is unrealistic I would suggest it is worth trying to prepare the calculation as accurately as possible using the procedure set out in the second thread as this will help in the credibility of your argument and may push negotiations into more sensible territory.

    The rough calculation:

    For this you need to know the following:-

    1) The ground rent and any rises
    2) Value of your flat if it had a long lease and negligible ground rent
    3) Term remaining


    There are THREE parts and the premium for the lease extension is the sum of those THREE parts

    1) Take the ground rent if fixed simply times the annual figure by 15. If the ground rent rises periodically simply times the current annual figure by 18

    2) Take the value of the flat and then divide it by the figure in column A in the table below. (Always round down the term so 74.5 years remaining look up 74)

    3) Take the value of the flat and apply the % in column B below and from that deduct the result in 1 and 2 above. Take the result and take 50% of that figure (only if positive). (Always round down the term so 74.5 years remaining look up 74)


    The premium payable is the sum of all three steps

    Years remaining......A.........................B
    85.00 …………………. 63.25 …………………. 0.00%
    84.00 …………………. 60.24 …………………. 0.00%
    83.00 …………………. 57.37 …………………. 0.00%
    82.00 …………………. 54.64 …………………. 0.00%
    81.00 …………………. 52.04 …………………. 0.00%
    80.00 …………………. 49.56 …………………. 0.00%
    79.00 …………………. 47.20 …………………. 3.00%
    78.00 …………………. 44.95 …………………. 3.00%
    77.00 …………………. 42.81 …………………. 3.00%
    76.00 …………………. 40.77 …………………. 3.00%
    75.00 …………………. 38.83 …………………. 5.00%
    74.00 …………………. 36.98 …………………. 6.00%
    73.00 …......……. 35.22 …............ 7.00%
    72.00 …………………. 33.55 …………………. 8.00%
    71.00 …………………. 31.95 …………………. 9.00%
    70.00 …………………. 30.43 …………………. 10.00%
    69.00 …………………. 28.98 …………………. 10.30%
    68.00 …………………. 27.60 …………………. 10.60%
    67.00 …………………. 26.28 …………………. 10.90%
    66.00 …………………. 25.03 …………………. 11.20%
    65.00 …………………. 23.84 …………………. 11.50%
    64.00 …………………. 22.70 …………………. 11.80%
    63.00 …………………. 21.62 …………………. 12.10%
    62.00 …………………. 20.59 …………………. 12.40%
    61.00 …………………. 19.61 …………………. 12.70%
    60.00 …………………. 18.68 …………………. 13.00%
    59.00 …………………. 17.79 …………………. 13.70%
    58.00 …………………. 16.94 …………………. 14.40%
    57.00 …………………. 16.14 …………………. 15.10%
    56.00 …………………. 15.37 …………………. 15.80%
    55.00 …………………. 14.64 …………………. 16.50%
    54.00 …………………. 13.94 …………………. 17.20%
    53.00 …………………. 13.27 …………………. 17.90%
    52.00 …………………. 12.64 …………………. 18.60%
    51.00 …………………. 12.04 …………………. 19.30%
    50.00 …………………. 11.47 …………………. 20.00%


    So for example a lease of 73.25 years remaining. Ground rent £30 per annum for first 33 years £60 for the next 33 years and £90 for teh final 33 years remaining. Flat worth £180k if it had a long lease

    Step 1 - Ground rent of £30 X 18 (as it rises) = £540

    Step 2 - £180k divided by 35.22 = £5,111

    Step 3 - £180k X 7% = £12,600 less £540 less £5111 = £6949 X 50% = £3,475

    Premium payable = £540 + £5,111 + £3,475 = £9,126 for a 90 year ext with the ground rent falling to a peppercorn

    #2
    Thanks - this is very helpful!

    Comment


      #3
      Is there a formula for extending to 99 years,not the additional 90 years and factoring in the increased ground rent.

      Many thanks

      lostboy

      Comment


        #4
        Calculate the premium as above and then deduct the value of the new ground rent stream.

        The freeholder may want more than what that result gives as by going outside of teh Act ie not giving a 90 year ext he will be unable to rollover the capital gain

        Comment


          #5
          Many thanks for your swift reply sgclacy.

          Regards

          lostboy

          Comment


            #6
            Thank you, this is very interesting.

            Would the same rough calculation apply to extend the headlease of a block of flats? Adding the value of all the flats together as the property value?

            Comment


              #7
              ah wonderful this is what I have been looking for!!

              Comment


                #8
                SGLacy can you expand the table to incldue properties with up to 125 years remaining.

                Comment


                  #9
                  Can you expand the thread to include shorter leases say down to 35 years left?

                  Comment


                    #10
                    This is absolutely great . Does any one have a letter or form that I can issue to my Freeholder to start the process??
                    Thanks

                    Comment


                      #11
                      Originally posted by jcgrinan View Post
                      Does any one have a letter or form that I can issue to my Freeholder to start the process?
                      The form of Notice is under s.42 of the Leasehold Reform Housing and Urban Development Act 1993. Contact a reputable law form supplier- e.g. Oyez, at http://www.oyezforms.co.uk/
                      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
                        Hi sgclacey

                        Is this calculation still valid or have there been changes to the system since 2008?

                        Thanks.

                        Comment


                          #13
                          The system hasn't changed but relativity has changed since the credit crunch as lenders are ever more reluctant to provide loans on shorter lease residential property. A recent LVT decision recognised this in their determination. No doubt Mr Lacey will update this calculator in due course. The decision to which I refer is right up to the minute given in mid February 2011 under LVT reference LON/00AC/OLR/2011/0001.

                          The Tribunal concluded that the RICS relativity graphs were of pre credit crunch relativities and considered that the situation has changed. This means that the practice of seeking to settle based on decisions and other settlements pre credit crisis is faulty.Lease has yet to take all of this on board; but the effect could well be to increase premia by a very substantial percentage across all expiration ranges down to about 25 years to reversion and premia to be paid will now more accurately reflect what would be the case if decisions really were in a "No Act World".

                          Comment


                            #14
                            The increases if in line with Beckett and Kayes study would result in increases for flats which are mortgage dependent with between 60-80 years being very substantial indeed. On a flat with 72 hrs worth £150k with a ground rent of £75.00 the premium would jump from around £8k to £13k.

                            The advice that a lessee seek a lease extension before the term drops below 80 years is very relevant now. Remember the serving of a valid section 42 notice fixes the valuation date so if you are near 80 years serve a notice even if you are confident that the freeholder will be reasonable. Do bear in mind that by serving the notice you become liable for the landlords reasonable legal and valuation fees.

                            I will update my calculation shortly when we have a better idea as to how much regard is taken by the LVT. We have seen it has taken many months of near zero interest rates for the capitalisation rate for income to come down from 8% to now 6.5%. I suspect that as the problems in the housing Market worsen in the next year or so that the appreciation of the problems that a short lease poses will be taken on board and the differential will move to what Beckett and Kaye have put forward.

                            Lenders faced with a falling Market will continue to seek higher deposits and be more strict in their underwriting so a short lease needs to be addressed soon rather than later.

                            Comment


                              #15
                              I will update my calculation shortly
                              Hi sgclacy, do you have any news on this calculation?

                              Many thanks.

                              Comment

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