Leasehold Valuation
Discussion
I own the freehold to a building divided into 3 flats, each on long leaseholds.
One of the leaseholders has asked to extend his lease to 125 years.
Now I understand that he can force an extension through the leasehold valuation tribunal. So what I want to do is find out if his offer is fair...And I understand that there is a standard calculation that applies to extending leases. I'm not looking to fleece the guy, but want to make sure I'm not being fleeced myself.
So...does anyone know what the equation is?
P.S. could a Mod please correct the spelling og my title please?
>> Edited by danhay on Tuesday 23 May 21:04
One of the leaseholders has asked to extend his lease to 125 years.
Now I understand that he can force an extension through the leasehold valuation tribunal. So what I want to do is find out if his offer is fair...And I understand that there is a standard calculation that applies to extending leases. I'm not looking to fleece the guy, but want to make sure I'm not being fleeced myself.
So...does anyone know what the equation is?
P.S. could a Mod please correct the spelling og my title please?
>> Edited by danhay on Tuesday 23 May 21:04
Hi,
Let them offer and then, you counter offer!
Seriously now, you're aware that the LVT will force you to do it, so it might be best to agreed without their intervention, but that does not mean they will necessarily side with either of you, and will make their own calculations. It will be based on:
the reduction in the value of your interest in the freehold (i.e. present value of your all your ground rent and of the property itself if you were to sell it), using an IRR that you (reasonably) make up (you can argue interest rates and inflation won't stay this low).
then they will calculate the increase in value of the property WITH the extension on the lease, another made up figure, but use estate agent prices for similar properties with the longer lease to add weight to your price. This is halved between you and the leaseholder.
Finally if you can argue that you were able to develop the property further if it were not for the extended lease, you may be entitled to compensation. Again, another arbitrary figure.
If you are talking relatively big sums after doing that quick valuation in your head, then hire a professional valuer, especially if your leaseholder DOESN'T.
Let them offer and then, you counter offer!
Seriously now, you're aware that the LVT will force you to do it, so it might be best to agreed without their intervention, but that does not mean they will necessarily side with either of you, and will make their own calculations. It will be based on:
the reduction in the value of your interest in the freehold (i.e. present value of your all your ground rent and of the property itself if you were to sell it), using an IRR that you (reasonably) make up (you can argue interest rates and inflation won't stay this low).
then they will calculate the increase in value of the property WITH the extension on the lease, another made up figure, but use estate agent prices for similar properties with the longer lease to add weight to your price. This is halved between you and the leaseholder.
Finally if you can argue that you were able to develop the property further if it were not for the extended lease, you may be entitled to compensation. Again, another arbitrary figure.
If you are talking relatively big sums after doing that quick valuation in your head, then hire a professional valuer, especially if your leaseholder DOESN'T.
No chance! Having looked into it a bit further, it's seems a bit more complicated than a formula and requires market evaulation as well as some special tables. Based on an example I found the offer should be nearer £20k! So I'm going to get my friendly neighbourhood surveyor to come up with a figure. Not only will it be more accurate, but will carry more weight in negotiations.
The good news is that he has 78 years on the lease, if it's 80 years or more then they can't factor in the marriage value which seems to be the largest part of the equation.
Your friendly neighbourhood surveyor might not be the best person to ask about this as there as a lot more to it than just looking at "with" and "without" values.
There are some cases going through appeal at the moment which are deciding on the appropriate discount rate for the reversionary value. The effect on capital value could be substantial as the discount rate has traditionally been 6% but might now be set at something like 4.25%.
Working out the arguments on the appropriate discount rate is becoming increasingly complex.
As a result this is quite a specialist area but I know some people whose business it is to work out these things. If you are anywhere near the W1 area then I could put you in touch.
There are some cases going through appeal at the moment which are deciding on the appropriate discount rate for the reversionary value. The effect on capital value could be substantial as the discount rate has traditionally been 6% but might now be set at something like 4.25%.
Working out the arguments on the appropriate discount rate is becoming increasingly complex.
As a result this is quite a specialist area but I know some people whose business it is to work out these things. If you are anywhere near the W1 area then I could put you in touch.
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