lease pricing

Lease pricing

Lease Pricing

• Distinction between owner-occupied and tenanted commercial property

• Our focus is on the latter, characterised by the landlord / tenant relationship

• Tenants’ commercial property requirements…

• Rent is the cost of occupation

Leases• Interests in land and contracts• Law provides backdrop to negotiations and resultant structures• Wherever hallmarks of a lease are present (i.e. exclusive possession for

a fixed or ascertainable period) the arrangement is a lease• Approx. 40% leases contracted out LTA54• Less able to sublet / assign short leases• Recommended reading:

– RICS (2006) Valuation Information Paper 8: Analysis of Commercial Lease Transactions, RICS, London

– Crosby, N., Hughes, C. and Murdoch, S. (2005) Monitoring the 2002 Code of Practice for Commercial Leases, Office of the Deputy Prime Minister, London

Lease Terms Lease Incentives

Alternative lease arrangements

LengthRent review typeRent review frequencyUse clauseImprovementsRepairsAssignmentSub-lettingBreaks(rent caps / floors)

Rent-free periodsCapital contributions, including:• fitting-out costs• take-back of existing premisesPremiums

Stepped rentsTurnover rents

Lease Terms• Repair

– FRI is norm but standalone second-hand property may modify strict FRI terms by reference to a schedule of condition

• Break clauses– Fixed points in time (rolling breaks are rare) whereas other means of flexibility

(assignment or subletting) can be undertaken at any time– 6 months is a typical notice period– Penalties for exercising breaks are occasional– Usually exercised for operational rather than affordability reasons

• Assignment– Usually preferable to subletting as it avoids taking on L responsibilities– Condition about parity of financial standing

• Sub-letting– Normal for a lease to require sublease to contain same terms and at least the same

rent or at MR. Allied Dunbar v Homebase Ltd (2002) held that an often-used side letter between T and ST for sidestepping head-lease conditions was not acceptable

– Usually sublease is required to be contracted out of LTA54 to prevent ST having right to renew sublease against HL should head-lease fall away

Can offer reverse premium on assignment if market dropped

Impact on value• Downside volatility has a floor based on covenant strength• Equity element is market-driven, via rent reviews and reversionary / residual

values, RPI or turnover rent provisions• Different lease terms should not impact on returns and therefore they should

be priced for risk and return – need lease pricing models and data on inclusion and operation of lease options

• Pricing of lease terms undertaken implicitly and without modelling – usually rent agreed first and then terms negotiated afterwards [what happens in other countries?]

• Lease incentives are different from lease terms – rent is a product of lease terms while incentives induce T to take lease, but both affect rent so must be included in lease pricing model

• Some incentives rely on lease terms to underpin them (e.g. UORR and lack of early break are needed for a long rent-free period or large capital contribution)

Landlords’ lease incentives1. rent-free periods

• Valuer needs to determine the effective rent assuming no rent-free period…

• Methods and assumptions vary depending on length of lease• Benefit to tenant is a short-term cash bonus at expense of increased rent

(known as the ‘headline rent’) later – there may be additional risk if rent reviews are upward-only

Rent-free periods(straight line method)

A ten year lease has been agreed at a ‘headline’ rent of £50,000 per annum with one year rent-free period and a rent review after five years. What is the effective rent (ER)?

If it was felt that ER would overtake the headline rent by the rent review then the headline rent should only be capitalised and amortised up to this point

Headline rent 50,000x 4 yrs 4CV of headline rent 200,000 5 yrs 5Annual equivalent of headline rent £40,000

Rent-free periods(straight line method)

If it was felt that MR would not overtake the headline rent by the rent review then the headline rent should only be capitalised and amortised up to the end of the lease

Headline rent 50,000x 9 yrs 9 CV of headline rent 450,000 10 yrs 10Annual equivalent of headline rent 45,000

•The first approach favours the T and the second the L•Choice depends on rental growth rate assumption...

Rent-free periods(time value method)

Now introduce the time value of money...

Headline rent 50,000YP 4 yrs @ 8%* 3.3121PV £1 1 yr @ 8% 0.9259CV of headline rent 153,334 YP 5 yrs @ 8% 3.9927Annual equivalent of headline rentdiscounted up to rent review (ER) £38,404

* Money discount rate


The headline rent may predominate past the rent review, i.e. rental growth is not enough to outstrip £50,000 p.a. (assuming up-only r/r’s)

Headline rent 50,000YP 9 yrs @ 8% 6.25PV £1 1 yr @ 8% 0.926CV of headline rent 289,375 YP 10 yrs @ 8% 6.71Annual equivalent of headline rentdiscounted over whole lease (ER) £43,125

Choice depends on rental growth rate assumption...


Growth rate for 5 year write-off:

38,404 x (1+g)^5 = 50,000

g = 0.0542

Growth rate for 10 year write-off:

43,125 x (1+g)^10 = 50,000

(1+g)^10 = 1.1594

g = 0.0149

...can also be done on Excel

Rent-free periods(straight-line method)

Now let’s introduce a fitting-out period...

Two ways of handling this1.Assume fitting-period already taken place before lease start2.Assume fitting-out period begins at lease start

A ten year lease has been agreed at a ‘headline’ rent of £50,000 per annum with 1.25 year rent-free period (including three months for fitting out) and a rent review after five years.

What is the effective rent?


1. Assuming fitting-out period already taken place:

Amortising the incentive over 5 yrsHeadline rent 50,000x 4 yrs (5 yrs less 1 yr rent-free) 4CV of headline rent 200,000 5 yrs (spread over 5 yrs assuming no fit-out) 5Annual equivalent of headline rent £40,000

Amortising the incentive over 10 yrsHeadline rent 50,000x 9 yrs 9CV of headline rent 450,000 10 yrs 10Annual equivalent of headline rent £45,000


2. Assuming fitting-out period starts at lease commencement:

Spreading the incentive over 5 yrsHeadline rent 50,000x 3.75 yrs (5 yrs less 1.25 yrs rent-free) 3.75CV of headline rent 187,500 4.75 yrs (spread over 4.75 yrs) 4.75Annual equivalent of headline rent £39,473

Spreading the incentive over 10 yrsHeadline rent 50,000x 8.75 yrs 8.75CV of headline rent 437,500 9.75 yrs 9.75Annual equivalent of headline rent £44,871


Amortising the incentive over 5 yrs and assuming the fitting out period starts at lease commencement:

Headline rent 50,000x YP 3.25 yrs @ 8% 3.1336PV £1 1.25 yrs @ 8% 0.9083CV of headline rent 142,311 YP 4.75 yrs @ 8% 3.8274x PV 0.25 yrs @ 8% 0.9809Deferred YP 3.7545Annual equivalent of headline rentdiscounted over whole lease (ER) £37,904


Amortising the incentive over 10 yrs and assuming the fitting out period starts at commencement of lease:

Headline rent 50,000x YP 8.75 yrs @ 8% 6.1254PV £1 1.25 yrs @ 8% 0.9083CV of headline rent 278,180 YP 9.75 yrs @ 8% 6.5976x PV 0.25 yrs @ 8% 0.9809Deferred YP 6.4719Annual equivalent of headline rentdiscounted over whole lease (ER) £42,983

Difficulties:•Choosing appropriate discount rate: borrowing rate, target rate?•Effective rent growing at ?% p.a.•Whether to include fitting-out period (likely to depend on whether tenant is in occupation / trading)

Rent-free periods(growth explicit DCF method)

A ten year lease has been agreed at a headline rent of £50,000 per annum with 1 year rent-free period (a three-month fitting-out period has already taken place) and a rent review after five years. What is the effective rent? Assume a 3.5% p.a. growth rate and a target rate of 10%

Over first five years, no rental growthHeadline rent 50,000YP 4 yrs @ 10% 3.1699 PV £1 1 yr @ 10% 0.9091CV of headline rent 144,085 YP 5 yrs @ 10% 3.7908Annual equivalent of headline rentdiscounted over whole lease (ER) £38,009

NB. This is the same answer as with growth implicit approach as there is no growth


Over lease term

Headline rent 50,000YP 9 yrs @ 10% 5.7590PV £1 1 yrs @ 10% 0.9091CV of 10 yrs of headline rent 261,774--------------------------------------------------Effective rent xYP 5 yrs @ 10% 3.7908CV of first 5 yrs of ER 3.7908x

Growth in ER @ 3.5% p.a. at review, (1.035)^5 1.1877xYP 5 yrs @ 10% 3.7908PV 5 yrs @ 10% 0.6209

2.7955xCV of 10 yrs of effective rent 6.5863x


If deals are financially equal

£261,774 = 6.5863x

So x (effective rent) = £39,745 p.a.

• Should the circumstances be such that the incentives will have an effect on the rent beyond year ten, the calculation above will be extended to fifteen years

• When will ER > HR?– Apply growth rate to check...

Landlords’ lease incentives2. capital contributions• Usually a financial payment but may also be for fitting out, taking

financial responsibility for an existing lease or some other non-pecuniary contribution

• L would expect to a rent in excess of market rent• Calculation of effective rent where a capital contribution has been

made and a headline rent is paid is same as for rent-free periods: determine the amount of the contribution and the length of the amortisation period (typically to a rent review or to the end of the lease)

Capital contributionsA landlord offers a tenant £100,000 to induce occupation under a new 15-year lease with five-year rent reviews at a rent of £300,000 per annum. Amortising the capital contribution over the period to the first rent review:

Headline rent (£) 300,000Capital contribution (£) -100,000YP 5 years @ 10% 3.7908Annual equivalent of capital contribution

-26,380

Effective rent (£) 273,620

Amortising the contribution over the whole lease produces a market rent of £286,853 per annum

Calculations can also be done using Excel...

Tenants’ lease incentives:Premiums• A premium is a consideration by a tenant to a landlord for the grant or

renewal of a lease on favourable terms, e.g.– reduced rent, less frequent rent reviews, a percentage-based rent at

review, landlord taking responsibility for repairs or insurance or a wider user-clause

• Benefit to a L is a cash-flow where a capital sum is received early, benefit to the T will be an immediate profit rent

• Key money may be paid by tenant (usually retail) to secure premises– Payment should be amortised and added to rent to estimate effective rent

• Important to determine whether a capital payment is for FFE, a trading position (key money) or in lieu of a rent saving (premium)

Rent estimate given a premium• To calculate market rent when a premium has been agreed, amortise

the premium over the period of the benefit and add it to the rent• E.g. at the start of a new lease with 5 year rent reviews the tenant

agrees to pay a rent of £10,000 per annum plus a premium of £11,750. What’s the effective rent?

Contract Rent (£) 10,000Premium (£) 11,750YP 5 yrs @ 10% 3.7908Annual equivalent of premium (£)

£3,100

Effective rent (£) 13,100

Premiums on assignment• Assignee may pay a premium if contract rent is below market rent• Assignee may pay a premium even if the property is already let at MR

because of– a perceived difference between rent at a new letting and rent at a review– the acquisition of a right to renew

• A property is let on a lease with 4 years remaining at a rent of £12,500 per annum. The current market rent is estimated to be £15,000 per annum. If the tenant assigns the lease what premium should be paid by the assignee to compensate for the profit rent?

• Capitalising the profit rent over the four years:

Profit Rent (£) 2,500YP 4 yrs @ 10%* 3.1699

Premium (£) 7,925*Risk-free rate plus premium for risk, lack of growth and illiquidity

Premiums for geared profit rents

• A lease might specify that, at each rent review, the rent is reviewed to a proportion of market rent. A premium might be paid by the tenant to compensate the landlord for offering such an incentive.

• E.g. a tenant pays a premium of £10,000 at the start of a ten-year lease where the rent is reviewed to 70% of market level in year five. The initial contract rent is £5,000 per annum but what is the effective rent of this property?

Effective rent for first 5 years (£) xLess contract rent for first 5 years (£) -5,000Profit rent (£) x - 5,000YP 5 yrs @8% 3.9927

3.9927x – 19,964Effective rent for second 5 years (£) xLess contract rent at review (£) 0.7xProfit rent (£) 0.3xYP 5 yrs @ 8%* 3.9927PV 5 yrs @ 8% 0.6806

0.8152xCapital value of profit rent 4.8078x – 19,964Premium to landlord should exactly compensate for the profit rent to tenant, therefore;

£10,000 = 4.8078x – 19,964x (effective rent (£)) = 6,232

Premiums for geared profit rents

Reverse premiums• A reverse premium is a capital payment usually made by an assignor of

a lease to induce the assignee to take occupation. This situation may arise in a depressed market where the supply of accommodation exceeds demand and the current rent exceeds the market rent; the property is thus over-rented. The assignor of a lease on a property that is over-rented will need to pay a reverse premium to the assignee equivalent to the capital value of the overage rent.

• E.g. a property was let two years ago for £250,000 p.a. on a ten-year lease with an upward-only rent review in the year five. The tenant wishes to assign the lease but the current market rent is £235,000 p.a. What size of reverse premium should the assignor pay the assignee?

Reverse premiums• This is calculated by determining the size of the overage rent (£15,000

per annum in this case) and then deciding over how long this overage rent would be paid for, bearing in mind that the rent review is upward-only and the future level of market rent will not be known.

• If we assume that rental growth for this property will be negligible over the remaining term of the lease we can capitalise the overage for 8 years at a yield based on fixed income investments suitably adjusted for risk. A relatively high yield of 12% has been used here to reflect the over-rented nature of the interest.

Market rent (£) 235,000Contract rent (£) 250,000Overage (£) -15,000YP 8 years @ 12% 4.9676Reverse premium (£) -74,514

Reverse premiums• If a valuer is seeking to use a property on which a reverse premium has

been paid as comparable evidence, the market rent of the property is calculated by deducting the annual equivalent of the reverse premium from the contract rent.

• E.g. assume the tenant assigned the lease and paid a reverse premium of £75,000 to the assignee. Assuming the rent review is upward-only the market rent is...

Contract Rent (£) 250,000Reverse premium (£) -75,000YP 8 years @ 12% 4.9676

-15,098Market Rent (£) 234,902

Lease pricingValuing Alternative Lease Arrangements

Introduction• Stepped rents• Turnover rents• Short leases and leases with break clauses

Stepped Rents• Series of rent increases at

intervals more frequent than 5 years

• Normally but not necessarily to pre-agreed sums

• Effective rent is determined by summing the PVs of each stepped rent payment and then calculating the annual equivalent of this sum over the period of the incentive

• E.g. property let on 15-year lease with 5-year rent reviews at a rent of £200,000 in year 1, £225,000 in year 2, £250,000 in year 3, £275,000 in year 4 and £300,000 in year 5. After year 5 the rent reverts to market level

• Assuming a 9% yield the sum of the PVs of the stepped rent is…

Year Rent (£) PV £1 PV (£)

1 200,000 0.9174 183,480

2 225,000 0.8417 189,383

3 250,000 0.7722 193,050

4 275,000 0.7084 194,810

5 300,000 0.6499 194,970

Capital value (£) 955,693

Capital value (£) 955,693

Divided by YP 5 years @ 9% 3.8897

Annual equivalent (effective rent) over first 5 years (£)

245,698*

Then amortise this sum over 5 years…

*lower than £300,000 so tenant must take a view on rental growth…

• Popular with shop units in shopping centres, airports and other transport termini, sometimes found in high street retail and petrol stations

• Favoured where comps difficult to obtain (e.g. units in a new development) or the landlord doesn’t wish to share rental information with tenants in a centre

• Provide landlord with incentive to maintain and enhance rental growth

– May also indicate the optimum time to refurbish

• Landlord’s management costs likely to be higher• Common arrangement is base rent (say 75-80% of MR,

and usually subject to 5-year rent reviews) plus rent based on % of the net turnover of the business

– % of turnover is determined by the profit margins obtainable from different trades and by the level of base rent; the lower the base rent the higher the percentage applied to turnover

Turnover Rents

Turnover Rents• Turnover lease terms can be complex, requiring a minimum trade

performance level, notional turnover if closed for several days, restrictions that only allow assignments to similar trades

• The tenant will normally try to cap the turnover rent at say 120% of market rent

• The most common type of turnover lease in the UK is where the tenant must pay either a market rent or a turnover rent, whichever is highest

• Yield used on turnover component of rent usually higher than that used to capitalise the base rent

• Current turnover usually capitalised

Turnover Rents• An example of a capital valuation of a shop subject to a turnover rent• The base rent is 80% of the market rent for this type of property and

the turnover rent is calculated as 5% of net turnover

Base rent @ 80% MR (£) 80,000YP perpetuity @ 8% 12.5

1,000,000Turnover rent @ 5% of turnover (£)

20,000

YP perpetuity @ 10% 10 200,000

Valuation (£) 1,200,000

Short leases & leaseswith break clauses• Internationalisation of business and changing business practice led to shorter

leases and more flexible terms• Shorter leases are not evident across all sectors though• Most break clauses now coincide with 5 and 10-year reviews and period of

notice is typically 6-12 months• Some break within first 3 years (usually less valuable properties)• Because of diversity of break option terms, cash-flow uncertainty tends to be

greater with a break clause than with a short lease • If a tenant vacates the landlord will incur a set of fixed and variable costs*• Short leases may lead to faster letting and reduce the need for rent-free

periods. Indeed, a short lease granted at a headline rent, together with penalty payments, may easily compensate for the risk of incurring voids and re-letting costs

*Fixed costs: fees for finding a new tenant. Variable costs: management & maintenance costs whilst property is empty, loss of rent until new tenant found and for the duration of any rent-free period offered to new tenant, and the cost of any other incentives that might be offered

Short leases & leaseswith break clauses• When valuing short, breakable leases, the most popular financial

adjustment was the inclusion of a rent void, but one which did not reflect the ‘true’ expected costs of the void. Instead it was moderated to reflect an estimated probability of the tenant breaking or not renewing.

• For breaks, the notice period and penalty payment would be factored in (i.e. a long notice period and big rent penalty would neutralise void allowance). When valuing shopping centres in which units are let on short leases, the valuer would build in a running void assumption into the cash-flow based on the average void rate and expected average void period.

Short leases & leaseswith break clauses

Lease variation Average rent impact

Review 1 break 10.45%Review 2 break 6.60%All rent review break 17.00%5 year lease 15.23%10 year lease 7.00%10 year lease with 5 year break 16.40%

3 year reviews -3.79%two way rent reviews 6.25%RPI lease 5.80%

• A higher rent* to compensate for the break option or short lease might be agreed but the level of the headline rent and the length of time over which it should be amortised will depend on views about rental growth over the lease term because, under a standard lease with upward-only rent reviews, the rent cannot fall whereas with a break the tenant could vacate

• It will also depend on the size of the penalty payment

• Impact will vary from sector to sector and is dependent on building and location quality

*This higher rent might be calculated by first valuing the flexi-lease with a rent void and perhaps a higher all-risks yield too, then valuing the same property assuming standard lease terms and finally equating the capital values of each by adjusting the rent reserved for the first five years using the goal-seek function on a spreadsheet.

Short leases & leaseswith break clauses | exampleCalculate the rent that should be paid for the first 5 years of a 10 year lease which has a break option and a rent review in year 5. It is assumed that there is a 6-month void at the break after which the rent reverts to the market rent (£300,000 p.a.)

Term 1 rent (£) xYP 5 years @ 6% 4.2124

4.2124xTerm 2 rent (£) 300,000YP perpetuity @ 6% 16.6667PV 5.5 years @ 6% 0.7258Valuation (£) 3,629,007

3,629,007+4.2124x

Short leases & leaseswith break clauses | exampleNow assume that the standard lease arrangement for this property is a 15 year lease with five year upward-only rent reviews let at a market rent of £300,000 per annum

If we assume that the capital value of the property subject to the flexi-lease and the standard lease arrangement should be the same we can state that:

£3,629,007 + 4.2124x = £5,000,000x = £325,466

Can also use Excel...

Market rent (£) 300,000YP perpetuity @ 6% 16.6667Valuation (£) 5,000,000

Lease pricingValuations at lease end

Lease end |Surrender & renewal of leases• T may wish to surrender current lease before its term has expired in order to

negotiate a new lease. Why?– Preserve goodwill attached to a particular location– Remove future uncertainty surrounding the terms of a new lease

• If L agrees, the capital value of any profit rent that the tenant was entitled to should be reflected in a rent reduction or some other financial benefit under the terms of the proposed lease

• Valuations ensure neither L nor T jeopardise their existing financial positions by calculating the capital value of each party’s present and proposed interests in order to determine the rent that should be reserved under the proposed lease

• In practice a negotiated settlement between L and T positions usually takes place and the impact of L&T legislation can strengthen T’s bargaining position

T wishes to surrender the remainder of an existing lease of a shop in Bath in return for the grant of a longer one

The present lease has 3 years to run with no review and the rent passing is £20,000 p.a.

The market rent is £27,000 p.a. and yield is 10%.

L is willing to accept the surrender and grant a new 15-year lease with 5-year rent reviews

Surrender & renewal of leases

Surrender & renewal of leases• Valuation of the landlord's present interest:

Term (Contract) rent (£) 20,000YP 3 years @ 9% 2.5313

50,626Reversion to market rent (£) 27,000YP perpetuity @ 10% 10.0000PV£1 3 years @ 10% 0.7513

202,851Valuation (£) 253,477

Surrender & renewal of leases• Valuation of the landlord's proposed interest:

Let new rent be (£) xYP 5 years @ 9% 3.8897

3.8897xReversion to market rent (£) 27,000YP perpetuity @ 10% 10.0000PV£1 5 years @ 10% 0.6209

167,643Valuation (£) 167,643 + 3.8897x

If the landlord is to be in the same financial position under the proposed terms as under the present terms then:

167,643 + 3.8897x = 253,477x (new rent) = £22,067

Surrender & renewal of leases• Valuation of the tenant’s present interest:

Market rent (£) 27,000Less Contract rent (£) -20,000Profit rent (£) 7,000YP 3 years @ 12% [a] 2.4018Valuation (£) 16,813

[a] This is the freehold all-risks yield adjusted upwards to reflect the additional risk and relative unattractiveness of a short leasehold investment

Surrender & renewal of leases• Valuation of the tenant’s proposed interest:

Assuming the value of the tenant’s present interest should equal the value of the proposed interest:

97,330 – 3.6048x = 16,813x (new rent) = £22,336

A single figure is usually negotiated that lies somewhere between the two rental values. In fact, in nominal cash-flow terms, the rent forgone by the landlord is the same as the profit rent gained by the tenant; the only reason different rental values are calculated is because the yields are different.

Market rent (£) 27,000Less new rent (£) - xProfit rent (£) 27,000 - xYP 5 years @ 12% 3.6048Valuation (£) 97,330 - 3.6048x

Key legislation affecting business tenancies• Landlord and Tenant Act 1927 (amended by

Landlord & Tenant Act 1954 Pt III)– compensation for improvements made by business

tenants during lease• Landlord and Tenant Act 1954 (Part II) (amended

by the Law of Property Act 1969)– security of tenure by continuing original term

subject to certain grounds for possession– compensation for disturbance

• Landlord and Tenant Act 1988– L’s consent provisions regarding T’s improvements

Lease end:Compensation payments

Lease end:Compensation paymentsA FH factory is held on a 21 year lease with five years left at a rent of £5,000 per annum. T carried out improvements (with L’s consent) four years ago which increased the MR by £1,000 per annum. The cost of these improvement today would be £7,500. The MR, including the value of improvements is £10,000 per annum and the Rateable Value is £12,000. Value the freehold interest in the property under each of the following scenarios:

a) T chooses to vacate at the end of the current leaseb) A new lease granted on expiry of current leasec) L repossesses at end of current lease for own

occupationd) L repossesses at end of current lease for

redevelopment (site value £100,000)

Compensation payments

• Assumptions:– nature of new lease; 10 years with a rent review in year 5– proper improvements (s1(1) LTA‘27); disregard value for 21 yrs (LPA’69)

at lease renewals– rent review in new lease will disregard value of improvements too– ARY 8%

• Income flows:

-4Impts

0Val’nDate

5Newlease

granted

10Review

15Furtherlease

granted

1721-yrexpiry

20Review

£5,000 £9,000 £10,000

current lease new lease further lease

21 year period

Compensation payments• T has right to improvements compensation if he chooses to vacate at end

of lease under Ss1-3 LTA 27 (as amended by LTA54)– lesser of cost of improvements or net increase in value of L’s interest as

result of improvements– Cost and value are determined at time of payment, i.e. end of lease

Cost (today) £7,500ValueIncrease in FRV £1,000YP perp @ 8% 12.5

£12,500Cost prevails as improvements compensation

• T has right to improvements and disturbance compensation if required to vacate

– Disturbance compensation (S37 LTA54); amount based on RV• If T occupation < 14 yrs = 1 x RV• If T occupation >= 14 yrs = 2 x RV, so 2 x RV (£12,000) = £24,000

– Improvements compensation as above• But these are future liabilities of L, need to consider:

– Changes in amounts (e.g. a rating revaluation, inflation in building costs)– Assume RV constant at 2010 revaluation and bldg costs rising at 3%pa– Appropriate discount rate - assume money market rate


a) T vacates on terminationTerm 5,000YP 5 yrs @ 7% 4.1002

20,501Reversion £10,000YP perp def 5 yrs @ 8% (12.5 x 0.6806) 8.5075

85,075105,576

Less cost of improvements - 7,500inflated over 5 yrs @ 3% 1.1593

- 8,695PV 5yrs @ 7% 0.7130

-6,200Valuation £99,376


b) New lease granted at end of leaseFirst 5 yrs (as above) 20,500

Next 15 yrs rent 9,000

YP 15 yrs @ 8% 8.5595

PV 5 yrs @ 8% 0.6806

5.8256

52,430

Final reversion FRV 10,000

YP perp def 20 yrs @ 8% (12.5 x 0.2145) 2.6813

26,813

Valuation £99,743


c) L repossesses at end of existing lease for own occupationValue (as above) £105,573

Less improvements (as above) -£8,694

Less disturbance; 2 x RV -£24,000

-£32,694

PV 5 yrs @ 7% 0.7130

-£23,311

Valuation £82,262


d) L repossesses at end of existing lease for redevelopment

Rent passing 5,000

YP 5 years @ 7% 4.1002

20,501

Reversion to site value 100,000

Less disturbance compensation -24,000

76,000

PV 5 yrs @ 7% 0.7130

54,188

Valuation 74,689

NB. No improvements compensation is payable because the value to L will be zero

lease pricing

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