More precise valuation for lease extentsion

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    More precise valuation for lease extentsion

    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

    (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%

    #2
    Hi SGC

    Can i just prefer to a calculation reference that I have come across twice on your posting. In Step 3 you say to deduct step 1 & 2 from the marriage value and then take 50% of that " if positive " , what do you do if it is negative ?.
    Thanks for your help on this I am a bit stuck, the only way I have calculated it is to take 50% of the marriage value and then add that to the ground rent and the other figure to achieve a total.
    Is that what you do if the figure is negative when doing it your way.

    Thanks Julea

    Comment


      #3
      In step 3 if the result is neagtive you ignore it and the premium will be the sum of Step 1 and Step 2

      Comment


        #4
        Hello SGC,


        Regarding the percentage points for term remaining below. Can you tell me if they are specifically for flats or freehold houses? I seem to remember seeing some varied tables from WA Ellis that made a distinction between them.


        I love the spreadsheet by the way!

        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%

        Comment


          #5
          Is this calculation still correct?

          I've been asked by my leaseholder what an extension would cost - do I still use 7.25% in the PV calc, 5% in the reversion calc and the values in column B for the marriage values?

          Comment

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