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Valuation of Lease Purpose
1. Property Outgoing: depends on the lease term - FRI lease now common - IR lease: landlord bears additional responsibilities such as external repair and building insurance. Require additional rent to cover extra liabilities 2. Lease Types and Liabilities: * FRI – Full Repairing and Insuring lease . Tenant has to cover external and internal repair and building insurance * IRI – Internal Repairing and Insuring. Landlord is responsible for external repair. Tenant is responsible for internal repair and building insurance * IR - Internal Repairing. Landlord is responsible for external repair and building insurance. Tenant is responsible for internal repair only
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Valuation of Lease Purpose
a. Adjustment for repairing liabilities: - Examine lease to determine responsibilities - Estimate cost and adjust rent : + Reference to part cost + Use planned maintenance program information + Landlord sets aside what he can afford + Percentage of market rent (MR) : # Commercial /10% ext reps 5% int. reps # Retail % ext reps 5% int. reps # Residential /40 % ext reps 10/20% int. reps b. Adjustment for insurance liabilities: - Not content but building ( fire etc) - Costs take into account + Cost of replacement of building + Professional fee + Cost converted into annual premium - Rent adjusted on following basis: + Annual cost ( premium) + Percentage basis – 2.5% - 5% market rent
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Valuation of Lease Purpose
c. Adjustment for liabilities: - Rent may include : + Business Rates + Management Expenses # Management Agents charge 5% to 10 % rent passing + Service charges ( provided not charge separately) # Common part maintenance/ decoration # Concierge/Reception # Heating # Lighting # Lift maintenance
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Valuation of Lease Purpose
3. Rent Adjustment for Outgoing: Example : Value the freehold interest in unit C , a 1000 sq. factory on small industrial estate which is to be let to a mobile phone distributor on an FRI lease Reference: - Unit A on same estate just let at a rent of £32,500 p.a. on 10 years FRI lease with a rent review in year 5. The property is 500sq. m and freehold sold for £300, Unit D on same estate is 2000sq. m and let 6 months ago on a 20 years IR lease with 5 year rent reviews at rent of £135,500p.a. - Unit B on the same estate and of the same size let 12 months ago at a rent of £61,000. The property was in poor condition needing substantial repair work to the roof, wall and services. The landlord agreed to bear responsibility for external repair
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Valuation of Lease Purpose
Solution: Adjust rent to conform the subject Unit ( Unit C): Analyze: Unit A : 1. Smaller so the rental value £/m² may be higher than m² unit. 2. Recent letting and FRI lease 3. FRI lease so no need to adjust this rent Unit D : 1. Twice the size, so rental value £/m² may be lower for m² 2. Relatively recent letting and slow market. 3. IR lease means landlord responsible for external repair and insurance
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Valuation of Lease Purpose
Unit B : 1. Same size as subject unit 2. Poorer condition 3. Land lord responsible for external repair Unit Rent Adjustment Net Rent Area M² Rent per m² A £32, None £32, £65 D £135, % ext. reps £119, £59.50 5% ins B £61, % ext. reps £54, £55
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Valuation of Lease Purpose
Unit C : - Range will probably fall £60 - £65/m² on FRI basis - Say £62/m² m² x £62 = £62,000 - Freehold valuation: FRV £62,000 YP perp. At 11% 9.09 Capital Value = £565,000 Yield adopted based on sale price achieved on unit A
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Valuation of Lease Purpose
4. Premiums - Traditional ( capital incentive) * A lump sum paid by tenant at start of lease in return for a reduction in rent. * Tenant immediately enjoys profit rent * Landlord takes capital sum lieu of rent. - Assignment Premium (leasehold valuation) * Paid by a purchaser or a leasehold interest i.e. new lessee buys existing lessee’s interest. * Equates to : capital value of profit rent * May include sum for goodwill, fixtures etc. so unable to reliably analyze. - Value from both tenant /leaseholder( YP Dual rate ) and freehold/ landlord’s( YP single rate) perspective.
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Valuation of Lease Purpose
Example 1 - A lessee has been granted a 15 year lease of a shop having a market rental value of £21,750. The agreement with the landlord is to pay £17,000 subject to the payment of a premium. There is a single review after 10 years. Freehold yield assumed to be 5% . Sinking fund rates currently at 3% How much should be the premium be? Solution: - Profit rent is capitalized until point at which market rent is reached. Tenant’s perspective : Landlord’s perspective: MR pa: £21, MR pa. £21,750 Less Rent paid £17, Less rent to be paid £17,000 Profit Rent £4, Reduction in Rent £4,750 x x YP 10 6% & 3% YP (tax ignored) Premium £32, Premium £36,678 Agree at £34,500
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Valuation of Lease Purpose
Other Examples: Please refer to note for 5 year rent reviews example. Example of calculation of rent reduction.
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