This is the Second Thread and seek to calculate the cost of a lease extension in a more precise way in the hope it will give greater creditability and push negotiations into more sensible territory if the offer you get form the freeholder is totally unrealistic.

For this you will need the following:-

1) The ground rent details of the current rent and when it rises and if so by how much

2) The value of the flat if it had a long lease and negligible ground rent

3) The start date of the term. Not to be confused with the date of the lease. Most circa 90% have a start date on one of the four quarter days (25 March, 24 June, 29 September or 25 December ) or 1 January

4) MicroSoft Excel

Firstly work out the term remaining and express it as a decimal. So 74 years and 4 months = 74 years plus 4/12 months = 74.333

Then produce a list of the ground rent pattern so if a lease initially had a £30 ground rent for the first 33 years then rises to £60 for the nest 33 years and then £90 for the final 33 years it would be expressed as follows:-

£30 for the next 8.33 years

£60 for the next 33 years but delayed for 8.33 years

£90 for the following 33 years but delayed (8.33 years + 33 years = 41.33 years)

This is actually THREE streams of income and we need to calculate the PRESENT VALUE of that stream of income using a CAPITILISATION rate. In Microsoft excel there is the formula for doing it :-

Assuming we are using 7.25% (in the formula we express this as 0.0725) for capitalisation of income the formula would be

=PV(0.0725,8.33,30) for the first of the three streams

=ROUND(PV(0.0725,33,60)/(1+0.0725)^8.33,9) for the second of the three stream

=ROUND(PV(0.0725,33,90)/(1+0.0725)^41.33,9) for the third of the three stream

The figures will be negative but present them as follows in your report. The figure 9 is the number of decimal places

£30 for the next 8.33 years. Present value at 7.25% = £182.81

£60 for the next 33 years but delayed for 8.33 years. Present value at 7.25% = £416.10

£90 for the following 33 years but delayed (8.33 years + 33 years = 41.33 years). Present value at 7.25% = £61.97

Capitalised value of ground rent =

This is the value of the flat assuming it had a neglible ground rent and very long term discounted back at 5% following Cadogan and Sportelli

So if the flat is worth £180,000 and the term remaining is 74.33 years the formula in Excel would be

=ROUND(180000/1.05^74.3333,9) In the formula 9 is the number of decimal places

The result should return

So in your report you would state that the deferred value of the reversion of £180,000 discounted back at 5% over 74.33 years = £4,788.

Only applicable if the lease term is below 80 years.

Look at the table below and apply the percentage in Column B to the value and from that result deduct the amount in Step 1 and Step 2 and if this is positive take 50% of that figure. Using the example above in you report

The flat has a vale of £180,000 if it had a long lease and a peppercorn rent and based on LVT cases relativity would be of the order of 94%

£180,000 X (100% - 94%) = £10,800

Less capitalisation of ground rent = £661

Less deferred value of reversion = £4788

Total £5,351

Landlord entitled to 50% = £2,678

The premium for a NINETY year extension to the existing term whereby the ground rent drops to a peppercorn is

Capitalisation of the ground rent.......£661

Deferred value of the reversion.......£4,788

Share of marriage value................£2,678

Total........................................£8,12 7

Term remaining B

79 ………………. 97.00%

78 ………………. 97.00%

77 ………………. 97.00%

76 ………………. 97.00%

75 ………………. 95.00%

74 ………………. 94.00%

73 ………………. 93.00%

72 ………………. 92.00%

71 ………………. 91.00%

70 ………………. 90.00%

69 ………………. 89.70%

68 ………………. 89.40%

67 ………………. 89.10%

66 ………………. 88.80%

65 ………………. 88.50%

64 ………………. 88.20%

63 ………………. 87.90%

62 ………………. 87.60%

61 ………………. 87.30%

60 ………………. 87.00%

59 ………………. 86.30%

58 ………………. 85.60%

57 ………………. 84.90%

56 ………………. 84.20%

55 ………………. 83.50%

54 ………………. 82.80%

53 ………………. 82.10%

52 ………………. 81.40%

51 ………………. 80.70%

50 ………………. 80.00%

For this you will need the following:-

1) The ground rent details of the current rent and when it rises and if so by how much

2) The value of the flat if it had a long lease and negligible ground rent

3) The start date of the term. Not to be confused with the date of the lease. Most circa 90% have a start date on one of the four quarter days (25 March, 24 June, 29 September or 25 December ) or 1 January

4) MicroSoft Excel

**(STEP 1) CAPITILISATION OF GROUND RENT INCOME**Firstly work out the term remaining and express it as a decimal. So 74 years and 4 months = 74 years plus 4/12 months = 74.333

Then produce a list of the ground rent pattern so if a lease initially had a £30 ground rent for the first 33 years then rises to £60 for the nest 33 years and then £90 for the final 33 years it would be expressed as follows:-

£30 for the next 8.33 years

£60 for the next 33 years but delayed for 8.33 years

£90 for the following 33 years but delayed (8.33 years + 33 years = 41.33 years)

This is actually THREE streams of income and we need to calculate the PRESENT VALUE of that stream of income using a CAPITILISATION rate. In Microsoft excel there is the formula for doing it :-

Assuming we are using 7.25% (in the formula we express this as 0.0725) for capitalisation of income the formula would be

=PV(0.0725,8.33,30) for the first of the three streams

=ROUND(PV(0.0725,33,60)/(1+0.0725)^8.33,9) for the second of the three stream

=ROUND(PV(0.0725,33,90)/(1+0.0725)^41.33,9) for the third of the three stream

The figures will be negative but present them as follows in your report. The figure 9 is the number of decimal places

£30 for the next 8.33 years. Present value at 7.25% = £182.81

£60 for the next 33 years but delayed for 8.33 years. Present value at 7.25% = £416.10

£90 for the following 33 years but delayed (8.33 years + 33 years = 41.33 years). Present value at 7.25% = £61.97

Capitalised value of ground rent =

**£660.88****(STEP 2) DEFERRED VALUE OF THE REVERSION**This is the value of the flat assuming it had a neglible ground rent and very long term discounted back at 5% following Cadogan and Sportelli

So if the flat is worth £180,000 and the term remaining is 74.33 years the formula in Excel would be

=ROUND(180000/1.05^74.3333,9) In the formula 9 is the number of decimal places

The result should return

**£4,788**So in your report you would state that the deferred value of the reversion of £180,000 discounted back at 5% over 74.33 years = £4,788.

**(STEP 3) MARRIAGE VALUE**Only applicable if the lease term is below 80 years.

Look at the table below and apply the percentage in Column B to the value and from that result deduct the amount in Step 1 and Step 2 and if this is positive take 50% of that figure. Using the example above in you report

The flat has a vale of £180,000 if it had a long lease and a peppercorn rent and based on LVT cases relativity would be of the order of 94%

£180,000 X (100% - 94%) = £10,800

Less capitalisation of ground rent = £661

Less deferred value of reversion = £4788

Total £5,351

Landlord entitled to 50% = £2,678

The premium for a NINETY year extension to the existing term whereby the ground rent drops to a peppercorn is

Capitalisation of the ground rent.......£661

Deferred value of the reversion.......£4,788

Share of marriage value................£2,678

Total........................................£8,12 7

Term remaining B

79 ………………. 97.00%

78 ………………. 97.00%

77 ………………. 97.00%

76 ………………. 97.00%

75 ………………. 95.00%

74 ………………. 94.00%

73 ………………. 93.00%

72 ………………. 92.00%

71 ………………. 91.00%

70 ………………. 90.00%

69 ………………. 89.70%

68 ………………. 89.40%

67 ………………. 89.10%

66 ………………. 88.80%

65 ………………. 88.50%

64 ………………. 88.20%

63 ………………. 87.90%

62 ………………. 87.60%

61 ………………. 87.30%

60 ………………. 87.00%

59 ………………. 86.30%

58 ………………. 85.60%

57 ………………. 84.90%

56 ………………. 84.20%

55 ………………. 83.50%

54 ………………. 82.80%

53 ………………. 82.10%

52 ………………. 81.40%

51 ………………. 80.70%

50 ………………. 80.00%

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