Enfranchisement- two flats @ 74 yrs. unexpired- price?

[andyash]

Can anyone give me an approximate value of a freehold interest?
The property is a converted double fronted Victorian house with 2 self contained 2 bedroom flats, one at first floor and one at ground floor. Both flats have unexpired leases of 74 years. Ground rent £25 per flat per year. There are no common areas and no service charges. The upkeep and repair of the property is the responsibility of both lease’s, basically split halfway through the floor. Gutters, down pipes, chimney stacks and underground drains are joint responsibility of the lease holders.


Approx leasehold value of each flat is £190,000


I just want an approximate idea of what the value of the freehold interest would be to purchase

[sgclacy]

The value is made up of three elements:-

Firstly capitalisation of ground rent – Total rent £50 per annum assuming it does not rise will be worth £667 using a discount rate of 7.5%

Secondly capitalisation of the reversion. Both flats worth say £200,000 each if they had a long lease and nil ground rent = £400,000. Deferred value at 5% over 74 years gives a factor of 37. Therefore £400k / 37 = £10,811

Thirdly marriage value. Take the £400k above and take 94% of that value = £376k a difference of £24k from this deduct the amounts calculated in steps 1 and 2 = £24,000 less £667 less £10,811 = £12,522 take 50% of that = £6,261

The cost of the freehold would be of the order of the sum of the three steps = £667 + £10,811 + £6,261 = £17,739 plus of course landlords legal and surveyors costs

[WizWard]

Andy,

I would take serious issue with some of the key elements of SG Lacy's valuation which I believe suffer from the usual endemic tenant-centric bias that permeates the lease-advice industry since, perhaps, this is usually comprised of those looking for work and fees from the more numerous body of usually less well-informed tenants.

Firstly (though less material) the 7.5% discount rent for ground rent is *at least* 100bp (1%) too high since, turning to the market rates section of the FT you will see that the starting point of the underlying l/term nominal rates (i.e. not real or inflation-adjusted) are nearer 4.5% - not to be confused with, for example, the s/term bank rate of 5.75% and LIBOR of about 6.5%. This is a common, but convenient, mistake made by the valuing profession i.e. not comparing like with like.

Secondly, I agree with the rate of 5% for flats (and it is 4.75% for houses) arduously and finally settled by the Lands Tribunal and then at the Court of Appeal in the Sportelli case. Prior to this, less-informed or well-resourced landlords outside "prime central London" had been regularly and consistently "stiffed" over the years with discount rates of anything up to 12% and 13% by the tenant-centric enfranchisement industry, or maybe circus, thereby decimating, and effectively confiscating, the true value of landlords' rightful property interests.

Thirdly, Mr Lacy has quoted a relativity of 94% which, looking at the well-known and oft-quoted "Graph of Graphs" (composed from data researched by Peter Beckett of Beckett & Kaye) appears to have been selected from the least-favourable plotted curve or series (for landlords) being the "LEASE: All LVT determinations" plot. This quoted series is not based upon any real evidence since it is merely derived from LVT determinations and each of these, in turn, were mostly derived from their other previous determinations ... ad infinitum i.e. a complete House of Babel. Probably the most accurate, though still not perfect, series on the Graph of Graphs is the Savills 1992 series since this is a) based on real market evidence at the time and, b) most importantly, is *not* tainted with decisions in an Act-impaired world - an important prerequisite stressed in the Arbib and then Sportelli decisions by the Land Tribunal and confirmed, in the latter case, in the Court of Appeal. Thus, reading from the more substantive Savills 1992 plot the relativity at 74 years is approximately 84%. If you re-calculate the formula presented by Mr Lacy but substitute this more accurate relativity percentage you will see this has a material effect on the marriage value.

If you would like to find a copy of the Graph of Graphs or to discuss further then contact me at mwdt_ward@yahoo.co.uk.


The value is made up of three elements:-

Firstly capitalisation of ground rent – Total rent £50 per annum assuming it does not rise will be worth £667 using a discount rate of 7.5%

Secondly capitalisation of the reversion. Both flats worth say £200,000 each if they had a long lease and nil ground rent = £400,000. Deferred value at 5% over 74 years gives a factor of 37. Therefore £400k / 37 = £10,811

Thirdly marriage value. Take the £400k above and take 94% of that value = £376k a difference of £24k from this deduct the amounts calculated in steps 1 and 2 = £24,000 less £667 less £10,811 = £12,522 take 50% of that = £6,261

The cost of the freehold would be of the order of the sum of the three steps = £667 + £10,811 + £6,261 = £17,739 plus of course landlords legal and surveyors costs

[sgclacy]

Firstly I am a full time landlord and all I deal with is long leasehold investments where leases are typically in the 70 -80 year bracket, and I believe we have spoken about indexed linked ground rents in the past.

I am not looking to generate any fees at all, if someone wants a spreadsheet where they can alter the variables and see the effect then I ask for a modest donation to "Children in Need" Incidently there is a memeber on this site who I provided a detailed spreadsheet to and then spent 1/2 hour on the phone who is still to pay me despite my prompting.

My figures are just rough approximations and the key factor is of course relativity. I "bash out" these quick calculations to help members get a ball park figure as to what they might expect to have to pay. Many people who ask are worried as they dont know whether they are looking at a few hundred pounds or tens of thousands pounds.

The ground rent usually on leases below 80 years is modest and it value is not contentious.

We have some certainty on the deferment rate at 5% following Cadogan and Sportilli

So we are left with relativity which is open to discussion and as a crude rule of thumb I use 1% for every year below 80 subject to a minimum of 3% and this rule of thumb is reasonable for lease terms down to about 65 years.

A reasonable landlord will get better figures than he would if the leasee goes to the LVT if he offers a reduced premium and an increase in the ground rent and puts no obstucles in the way and is pragmatic. Most lessees in my experience will take it as most approach the landlord when they want to sell.

[WizWard]

I do not seem to recall having spoken about index-linked ground rents with you but I am pleased to note that your viewpoint is not tainted by the prospect of deriving fees from tenants.

The ground rent is, as I believe I noted, not usually a material issue and the deferment issue is mostly settled (except that the tenant lobby is still clutching at straws with arguments that are pure hokum to wriggle out of the impact of the ruling) so let's focus on the relativity issue?

Unfortunately the valuing/surveying profession has relied upon "crude rules of thumb" rather than any serious evidence or analysis for far too long - almost always to the detriment of long-suffering landlords. Members of the valuing profession then act separately for both landlord and tenant and also staff the LVT panels perpetuating these baseless "crude rules of thumb".

Please advise what evidence exists to support your "rule of thumb" of a flat 3% minimum for any expiry period below 80 years? Why not 10% ... or 0.5%?

Why 1% for every year below 80 years?

[WinterSun]

Hi Andyash,

Mine cost £8.5k and that was based on very similar details to yours.