Leasehold Interest Flashcards
A property is leased for 5 years at a gross rental of $480,000 per annum with the tenant responsible for increases in outgoing only.
Base date outgoings were $100,000 p.a.
Rent is paid monthly in advance and there is 3 years remaining on the lease.
The current market rental value is $500,000 per annum net.
Determine the lessee’s interest in the property adopting a nominal discount rate of 6%.
NOTE: Round your answer to the nearest whole dollar
Between 330,353 and 330,355
ANSWER
$500,000 less ($480,000 G - $100,000 OG’s) = $120,000 Profit Rent
PMT = $120,000 / 12 = $10,000 pcm
N = 3 x 12 = 36
I = 6/12 = 0.5
BGN MODE
PV = $330,353.71
A property is leased for 8 years at a gross rental of $600,000 per annum with the tenant responsible for increases in outgoing only. Base date outgoings were $120,000 p.a.
Rent is paid monthly in advance and there is 4 years remaining on the lease.
The current market rental value is $680,000 per annum net.
Capitalisation and Discount rate is 6% p.a (nominal)
Determine the lessors’s interest in the property using the TERM & REVERSION approach.
NOTE: Round your answer to the nearest whole dollar
Between 10,688,789 and 10,688,791
ANSWER
TERM (or PV OF LEASE RENTAL)
$600,000 GR - $120,000 OG’S = $480,000 PMT
$480,000 / 12 = $40,000 pcm = PMT
N = 4 X 12 = 48 I = 6/12 BGN MODE PV = $ 1,711,728.78
ADD
UNADJUSTED MARKET VALUE (OR CORE VALUE)
Current Market Net Rental = $ 680,000
Capitalised at 6% = $11,333,333.33
DEFERRED FOR 4 YEARS
FV $ 11,333,333.33, N = 4, I = 6 PV = $ 8,977,061.51
LESSORS INTEREST $ 10,688,790.29
A life tenancy has been willed within residential estate to the long-term housekeeper. The housekeeper is 60 years old. Actuarial life tables estimate the housekeeper would have around 27 years to live. The life tenancy was willed on the basis that the tenant is responsible for annual outgoings ($ 8,000 p.a). The gross market rental value of the property is $ 44,000 p.a.
Calculate the life tenant’s interest based on monthly cash flows in advance and adopting a nominal annual discount rate of 3.6%.
NOTE: Round your answer to the nearest $1000.
Between 623,000 and 623,000
ANSWER
$44,000 - $8,000 = $36,000 / 12 = $ 3,000 per month PMT (BGN Mode)
N = 27 x 12 = 324
I = 3.6 / 12 = 0.03
PV = $622,986
The freehold value, in possession, of a commercial property is assessed at $ 4,000,000.
However, the property is subject to an existing lease at less than market rental value.
As such a lessee’s interest has been assessed at $ 600,000.
The Lessors interest in the same property has been assessed at $ 3,000,000
What is the Lessee’s interest in any ‘Marriage Value’ calculated on an equal half share basis?
Between 200,000 and 200,000
ANSWER
$4,000,000 – ($3,000,000 +$600,000) = $400,000 MARRIAGE VALUE
Lessee’s Interest = 50% x $400,000 = $200,000
The freehold value, in possession, of a commercial property is assessed at $ 4,000,000.
However, the property is subject to an existing lease at less than market rental value.
As such a lessee’s interest has been assessed at $ 600,000.
The Lessors interest in the same property has been assessed at $ 3,000,000
What is the Lessee’s interest in any ‘Marriage Value’ calculated on an interest held basis?
Note: Round your answer to the nearest dollar
Between 66,666 and 66,668
ANSWER
$4,000,000 – ($3,000,000 +$600,000) = $400,000 MARRIAGE VALUE
Lessee’s interest in Marriage Value = $600,000 / $3,600,000 = 16.67%
16.67% x $400,000 = $66,667
A life tenancy has been willed within residential waterfront estate to the long-term housekeeper. The housekeeper is 55 years old.
Actuarial life tables estimate the housekeeper would have around 22 years to live.
Rates and taxes are required to be paid by the life tenant, who has the right to sublease or otherwise deal with the property as if it were her own.
The current freehold value of the property, in possession, is estimated at $ 40,000,000.
Calculate the remainderman’s interest adopting an effective annual discount rate of 2% p.a
NOTE: Round your answer to the nearest $1000.
Between 25,873,000 and 25,875,000
ANSWER
FV $40,000,000
N = 22
I = 2
PV = $ 25,873,561
Use the ‘bonus/shortfall’ approach and indicate the “core value of the property.
Your research indicates the current market rent to be $250,000 pa net and that an equivalent yield of 9.5% pa would be appropriate.
Lease Term: 10 years from 4th April, 2017
Rent Review: 3 yearly to market
Initial Lease Rent: $200,000 per annum net from 4th April, 2017
Most Recent Review: $230,000 per annum net from 4th April, 2020
Outgoings: Fully paid by tenant
Valuation Date: 4th April, 2021
“Core Value” is the market rent capitalised without any adjustment for ‘bonus’ or ‘shortfall’ due to vacancies, capital expenditure, surplus rent, next rent reviews, etc.
Hence, market rent of $250,000 capitalised at 9.5% = $2,631,579
The value of the following property using the “Term & Reversion” method is $2,365,289
Lease term: 8 years from 01/04/17
Rent review: 3 yearly to market
Initial lease rent: $200,000 pa annually in arrears
Most recent rent review: $220,000 pa effective from 01/04/20
Outgoings: Fully paid by tenant
Valuation date: 01/04/21
Research indicates the current market rent is $240,000 pa and that an equivalent yield of 10% is appropriate for this property
What would be the value of the property if the “Bonus / Shortfall” method was used?
Both “Bonus/Shortfall” and “Term & Reversion” will produce a same value. So the correct answer is a value equal to $2,365,289 without any calculation.
You are assessing a property where market rent is $50,000 per annum net.
Passing rent is $35,000 per annum, under the current lease which has 2 years to run.
The appropriate rate of interest is 9.5% effective.
Calculate:
A. The value of the lessee’s interest?
B. The value of the property subject to the lease (lessor’s interest), using
both the Shortfall/Bonus method
C. The value of the property subject to the lease (lessor’s interest), using
both the Term and Reversion Method
A. Lessee’s Interest
N = 2 I = 9.5 PMT = 15,000 FV = 0
COMP PV = $26,208.80
B. Lessor’s Interest
Shortfall/Bonus Method
Step 1: Freehold Value of Property
*Market Rent: $50,000 net
*Capitalisation Rate: 9.5%
*Market Value (Core Value) Value)= 50,000 /9.5% = $526,315.79
Step 2: Value of Tenants Interest
*Shortfall = 50,000-35,000 = 15,000 p.a.
* PV of shortfall
N = 2 I = 9.5 PMT = 15,000 FV = 0; COMP PV = $26,208.80
Benefit to lessee of $26,208.80 and shortfall to lessor of $26,208.80
Step 3: Market value of property subject to Lease
* Adjusted Market value of property
= 526,315.79 26,208.80
C. Lessor’s Interest
Term and Reversion Method
Step 1: Value of the Term
* N = 2 I = 9.5 PMT = 35,000 FV = 0
* PV = $61,153.85
Step 2: Present Value of the Reversion
* Market Rent: $50,000 p.a. net
* Capitalisation Rate: 9.5%
* Market Value (Core Value) Value)= 50,000 / 9.5% = $526,315.79
* Discount back 2 years to period 0
- PV of Reversion
N = 2 I = 9.5 PMT = 0 FV = 526,315.79
PV = $438,953.14
Step 3: Market value of property subject to Lease
* Adjusted Market value of property
= 61,153.85 + 438,953.14
= $500,106.99
Consider the following:
* A site is leased to a head lessee at a market ground rent of $200,000 pa net.
* The head lessee develops the site and sub leases the property at $500,000 p.a. net which is $50,000 p.a. net below market rent.
* The lease has 32 years left to run. The head lessee’s interest rate is 9% p.a.
*
The sub lessee interest rate is 8% p.a.
What is the head lesssee’s interest? What is the sub-lessee’s interest?
What is the head lessee’s interest?
Income from sub lessee $500,000
Less: Ground Rent ($200,000)
Net Income $300,000 p.a.
* N = 32 / I = 9 / PMT = 300,000
* PV = $3,121,872
Sub Lessee’s Interest
Market Rent $550,000
Less: Lease Rent ($500,000)
Profit Rent $50,000 p.a.
* N = 32 / I = 8 / PMT = 50,000
* PV = $571,750
Note: The discount rates used will need to be analysed from both market transactions and in relation to other classes or types of tenants.
What is the marriage value if:
Freehold Value $10,000,000
Lessor’s Interest $6,000,000
Lessee’s Interest $3,000,000
$1,000,000
What is the Lessor’s and Lessee’s Share of the Marriage Value on an Interest Held basis?
Freehold Value $10,000,000
Lessor’s Interest $6,000,000
Lessee’s Interest $3,000,000
Lessor’s Interest
$6,000,000 = 66.67% of $9,000,000
Lessee’s Interest
$3,000,000 = 33.33% of $9,000,000
Lessor’s Share:
On an interest held basis: $1,000,000 x 66.67% = $666,667
Lessee’s Share:
On an interest held basis: $1,000,000 x 33.33% = $333,333
A property is leased for $100,000 per annum net with 3 years remaining on the lease.
Market rental is $140,000 per annum net; and,
Sales evidence for the sale of freeholds indicates a capitalisation rate of 8%.
What is the lessee’s interest?
Lessee’s interest
N = 3
I = 8
PMT = -40,000
FV = 0
COMP PV = $103,084
The value of a Lessee interest is the present value of the profit rental for the unexpired term of the lease.
How is the head lessee’s interest calculated?
PV of the net income stream for the period of the term certain of the lease.
To reflect the leasehold tenure, the discount rate should be higher than that used to calculate the freehold value. If different discount rates
are used to calculate various component interests, the sum of the various interests will not equal the freehold value. (Refer to Marriage Value)
How is the lessor’s interest calculated?
PV of current income stream plus PV of the reversionary freehold.
Calculated by way of Term and Reversion or Shortfall/Bonus method.
