Do-it-Yourself UK Leasehold Extension Calculations - Calculating Term

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Do-it-Yourself UK Leasehold Extension Calculations - Calculating Term

The Leasehold Advisory Service

http://www.lease-advice.org/newintro.htm

on its page

Valuation for Leasehold Extension
http://www.lease-advice.org/levaframe.htm

Assume: a flat with 68 years unexpired lease. The ground rent of is
£50 per annum and the present market value of the flat with its
existing lease is taken as £150,000.

In calculating the term they quote

In this example the yield is taken as 8%; the Years Purchase figure is
then looked up in the tables.
Years Purchase for 68 years @ 8% - 12.433
Ground rent £50 x 12.433 = £621

Save yourself some money

Don't bother with tables use a spreadsheet like Excel

The Excel Years Purchase formula in this case is as follows

=PV(8%,68,1)

which evaluates to 12.433

Just multiply this figure by the £50 Ground Rent

Use the Yield Rate on 2.5% Consols [look up on London Stock Market]

In 2004 it was approx. 4.8%
Or use Bank of England (Discount on Bills of Exchange) Rate,

[R. Mark Clayton]

Assume: a flat with 68 years unexpired lease. The ground rent of is
£50 per annum and the present market value of the flat with its
existing lease is taken as £150,000.

In calculating the term they quote

In this example the yield is taken as 8%; the Years Purchase figure is
then looked up in the tables.
Years Purchase for 68 years @ 8% - 12.433
Ground rent £50 x 12.433 = £621

And the reversion value? How about 150000 / 12.433 = ~£10,000?

Save yourself some money

Don't bother with tables use a spreadsheet like Excel

The Excel Years Purchase formula in this case is as follows

=PV(8%,68,1)

which evaluates to 12.433

Just multiply this figure by the £50 Ground Rent

Use the Yield Rate on 2.5% Consols [look up on London Stock Market]

In 2004 it was approx. 4.8%
Or use Bank of England (Discount on Bills of Exchange) Rate,

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The calculation of Term for a more complicated Ground Rent arrangement

Suppose the Ground Rent arrangements described in the lease are

99 years lease

And that the Ground Rent payable during this lease will be for

the first 25 years £150
the second 25 years £300
the third 25 years £600
the last 24 years £1200


But that one has only 78 full years left before the lease expires

The calculation of Term. Consider each of the 25 years periods
separately

Using Yield Rate at 4.75% (current Bank of England MLR)

Calculate "Years Purchase" factor at Present Value for £1 as follows
using Excel

Remainder of 1st 25 year Period =PV(4.75%,3,1) gives
2.74
Whole of 2nd Period =PV(4.75%,25,1) gives
14.45
Whole of 3rd Period =PV(4.75%,25,1) gives
14.45
Whole of 4th Period =PV(4.75%,24,1) gives
14.14




Multiply this figure by the annual Ground Rent for each period

2.74 * 150 = £410.41
14.45 * 300 = £4,336.19
14.45 * 600 = £8,672.38
14.14 * 1200 = £16,968.65


But one must defer these at compound interest rate of 4.75% per annum

Deference factors (in Excel formulae) of

Remainder of 1st 25 year Period =1/(1.0475)^0 = 1
Whole of 2nd Period =1/(1.0475)^3 = 0.870037366

Whole of 3rd Period =1/(1.0475)^28 = 0.272701241
Whole of 4th Period =1/(1.0475)^52 = 0.089534488

Summary

£410.41 * 1 = £ 410.41
£4,336.19 * 0.870037366 = £3772.65
£8,672.38 * 0.272701241 = £2364.97
£16,968.65 * 0.089534488 = £1519.28

Total £8,067.31

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There are several theories regarding the Yield Rates used in the
calculations.

1. There's a long history of using a fixed rate of 7%.

2. Yield should be based on a yield calculated from 2.5% consolidated
stock. (4.82% on average in 2004)

3. Use Bank of England Minimum Lending Rate (4.75% at present)

3. There should be two separate yield rates calculated on day of
valuation.

a) Capitalisation of the Ground Rent (converting to peppercorn)
Term yield, 8.75% Treasury Stock (2017) + 1% risk premium as at
valuation date

b) Reversionary Rate
Reversionary yield, 8.75% Treasury Stock (2017) + 3% risk premium -
inflation rate


Sources:
a) Inflation rate = change in Retail Price Index (RPI) for previous 12
months
http://www.statistics.gov.uk/downloads/theme_economy/RP04.pdf

b) Bank of England Minimum Lending Rate (or Base Rate)
http://www.bankofengland.co.uk/mfsd/rates/baserate.pdf

c) 2.5% Consolidated Funds
Current Value
http://uk.finance.yahoo.com/q?s=GBIRC2H=L
http://www.citytext.com/doc15a.html#unds

d) 8.75% Treasury Stock (2017)
http://uk.finance.yahoo.com/q?s=GBT8T17=L


References

http://www.cem.ac.uk/research/files/detr1.pdf
http://www.cem.ac.uk/research/files/detr2.pdf

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Other Yield Rate indicators

FT.Com daily tabulations of UK gilts prices
http://news.ft.com/markets/gilts

Use redemption rates

FT.Com daily tabulations of UK interest rates
http://news.ft.com/markets/ukrates

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Calculating the value of property with an unexpired lease relative to
its apparent freehold value.

A good approximation of the factor is the following (based on Land
Valuation Tribunal data)

(1 - e^(-0.03942 * no of years unexpired))

For example, a maisonette with an unexpired term of 53 years would have
a relative value of (1-e^(-0.03942 * 53)) = 0.8762 or 87.6% of its
freehold value

Where e = 2.718281828

As an Excel spreadsheet formula

=(1-(2.718281828^(-0.03942*53)))

which evaluates to

0.876221302