OF
LEASE INTERESTS
Comprehensive Real Estate Appraisal Seminar and Training (CREASAT) RTPunzalan, CPV
LEASE INTERESTS
Bundle of Rights
Rights generally inherent in the ownership of real estate
include but are not limited to the following:
The right to sell
The right to lease
The right to mortgage
The right to sell or lease a partial interest
The right to build improvements thereon
The right not to do any of the above
The bundle of rights can be divided through various
instruments including leases, easements, and mortgages.
Through these instruments, one party owns or controls certain
rights whereby another party owns or controls other rights.
Comprehensive Real Estate Appraisal Seminar and Training (CREASAT) RTPunzalan, CPV
LEASE INTERESTS
Comprehensive Real Estate Appraisal Seminar and Training (CREASAT) RTPunzalan, CPV
LEASE INTERESTS
DEFINITION OF TERMS
Lease.
• A contract arrangement in which rights of use and possession
are conveyed from a property’s title owner (called the
landlord, or lessor) in return for a promise by another (called
a tenant, or lessee) to pay rents as prescribed by the lease.
• A lease is an agreement whereby the lessor (owner of
property) allows the lessee use of the property in exchange
for lease payments.
• In practice the rights and the duties of the parties can be
complex, and are dependent on the specified terms of their
contract.
Comprehensive Real Estate Appraisal Seminar and Training (CREASAT) RTPunzalan, CPV
LEASE INTERESTS
DEFINITION OF TERMS
Lease.
• Classification of Leases
• Operating Lease
• Operating leases give the lessee the use of property
without ownership.
• Financing Lease
• More popularly known locally as lease-to-own
• Financing leases transfer ownership from lessor to
lessee.
Comprehensive Real Estate Appraisal Seminar and Training (CREASAT) RTPunzalan, CPV
LEASE INTERESTS
DEFINITION OF TERMS
Comprehensive Real Estate Appraisal Seminar and Training (CREASAT) RTPunzalan, CPV
LEASE INTERESTS
DEFINITION OF TERMS
Comprehensive Real Estate Appraisal Seminar and Training (CREASAT) RTPunzalan, CPV
LEASE INTERESTS
DEFINITION OF TERMS
Rent Types
Market Rent.
• The estimated amount for which a property, or space within a
property, should lease on the date of valuation between a
willing lessor and a willing lessee on appropriate lease terms in
an arm’s-length transaction, after proper marketing wherein
the parties had each acted knowledgeably, prudently, and
without compulsion
Comprehensive Real Estate Appraisal Seminar and Training (CREASAT) RTPunzalan, CPV
LEASE INTERESTS
DEFINITION OF TERMS
Comprehensive Real Estate Appraisal Seminar and Training (CREASAT) RTPunzalan, CPV
LEASE INTERESTS
DEFINITION OF TERMS
Positive Leasehold Interest
• A positive leasehold is created when the market rent is greater
than the contract rent.
Negative Leasehold Interest
• Negative leasehold interest is created when the contract rent is
higher than the current market rent.
• Even if the leasehold interest is positive, there may be no value
because the leasehold interest is not transferable to a third
party. The lease agreement may prevent a transfer.
• If the contract rent and the market rent are equal, the
Leasehold or Lessee’s Interest is zero, assuming there is no
leasehold improvements.
Comprehensive Real Estate Appraisal Seminar and Training (CREASAT) RTPunzalan, CPV
VALUATION OF LEASE INTERESTS
CONSIDERATIONS
Comprehensive Real Estate Appraisal Seminar and Training (CREASAT) RTPunzalan, CPV
VALUATION OF LEASE INTERESTS
CONSIDERATIONS
The importance of the distinction between the physical
matter and the legal interest in it is critical to valuation.
For example, a lease might specify that the lessee has no
right to sell or transfer the leasehold interest, causing it to be
unmarketable during the term of the lease.
Its value to the lessee, therefore, lies solely in the rights of
use and occupancy. The leasehold value may be expressed in
monetary terms but is not a Market Value as the interest
cannot be sold in the market.
However, the lessor’s interest (leased fee value) does have a
Market Value, based on the value of the rental income during
the lease together with any residual value remaining at the
end of the lease.
Comprehensive Real Estate Appraisal Seminar and Training (CREASAT) RTPunzalan, CPV
VALUATION OF LEASE INTERESTS
METHOD OF VALUATION
Comprehensive Real Estate Appraisal Seminar and Training (CREASAT) RTPunzalan, CPV
VALUATION OF LEASE INTERESTS
METHOD OF VALUATION
Comprehensive Real Estate Appraisal Seminar and Training (CREASAT) RTPunzalan, CPV
VALUATION OF LEASE INTERESTS
METHOD OF VALUATION
Comprehensive Real Estate Appraisal Seminar and Training (CREASAT) RTPunzalan, CPV
VALUATION OF LEASE INTERESTS
Income Approach – Discounted Cash Flow
0 1 2 3 4 5 6
PV1
+ pwf x I 1
I1
PV2
+ pwf x I 2
I2
PV3
+ pwf x I 3 I3
PV4
+ pwf x I 4 I4 I5
PV5
+ pwf x I5
RV
= pwf x RV
MV Reversion Value
(end of period)
Comprehensive Real Estate Appraisal Seminar and Training (CREASAT) RTPunzalan, CPV
VALUATION OF LEASE INTERESTS
EXAMPLE:
Mr. Lessor owns a property consisting of a parcel of land leased to Mr. Lessee
at an annual lease of P100,000. The lease which is about to commence is for 5
years. The lease is payable at the end of each year. Based on market data, the
capitalization rate for similar properties is 8% per year. The market value of
the property at the end of the lease is estimated at P1,500,000. Determine
the Lessor’s Interest.
Given Data:
Rental Rate is P100,000 per year
Lease Period is 5 years
Capitalization Rate is 8% per year
Value of Property at the end of Lease is P1,500,000
Comprehensive Real Estate Appraisal Seminar and Training (CREASAT) RTPunzalan, CPV
CASH FLOW DIAGRAM:
LESSOR’S INTEREST = NET PRESENT VALUE (NPV) OF RENTALS +
REVERSION VALUE OF PROPERTY
0 1 2 3 4 5
I1
P10,000 x NPV factor
I3
P10,000 x NPV factor
I4 I5
P10,000 x NPV factor
Comprehensive Real Estate Appraisal Seminar and Training (CREASAT) RTPunzalan, CPV
COMPUTATION:
A. NET PRESENT VALUE OF RENTAL
Comprehensive Real Estate Appraisal Seminar and Training (CREASAT) RTPunzalan, CPV
VALUATION OF LEASE INTERESTS
EXAMPLE:
Corp. A owns an industrial land and leases it to Corp. B. The lease is for 10 years and
commenced in 2008. Corp. B built a warehouse on the land and as stipulated on the
lease agreement, the warehouse will be turned over to Corp. A upon the expiration of
the lease. The starting rental rate is P80,000 per year and is subject to an increase of
P5,000 per year henceforth. Based on market data the capitalization rate of similar
properties is 6% per annum. The value of the land and the building are estimated at
P2,000,000 and P1,500,000, respectively, at the end of the lease. The rentals are
payable at the start of every year. Determine the Lessor’s Interest.
Given Data:
Date of Appraisal is 2010
Lessor is Corp. A
Lease Period is 10 years
Remaining Lease Period is 8 years
Rental Rate is P80,000 per annum subject to increase payable at the start of the year
Capitzalization Rate is 6% per annum
Value of Land at the end of the Lease is P2,000,000
Value of the Building at the end of the Lease is P1,500,000
Comprehensive Real Estate Appraisal Seminar and Training (CREASAT) RTPunzalan, CPV
COMPUTATION:
LESSOR’S INTEREST = NET PRESENT VALUE (NPV) OF RENTALS + REVERSION VALUE OF THE
LAND VALUE + REVERSION OF BUILDING VALUE
Comprehensive Real Estate Appraisal Seminar and Training (CREASAT) RTPunzalan, CPV
VALUATION OF LEASE INTERESTS
EXAMPLE:
Corp. C leases an office condominium unit in Makati. The lease is for 8 years
and will commence on January, 2011. Monthly rental is P20,000 payable on the
first day of every month. Based on market data, the prevailing rental rate for
condominium units is P25,000, and the capitalization rate is 6% per annum.
The unit is fully-furnished complete with telephone lines and air-conditioning
system. Determine the Lessee’s Interest.
Given Data:
Lease Period is 8 years
Contract Rate is P20,000 per month
Market Rent is P25,000 per month
Rental Gain is P5,000 per month or P60,000 per year
Capitalization Rate is 6% per year
Comprehensive Real Estate Appraisal Seminar and Training (CREASAT) RTPunzalan, CPV
COMPUTATION:
LESSEE’S INTEREST = NET PRESENT VALUE (NPV) OF RENTAL GAIN
Comprehensive Real Estate Appraisal Seminar and Training (CREASAT) RTPunzalan, CPV
VALUATION OF LEASE INTERESTS
EXAMPLE:
Corp. D is leasing a parcel of land in an industrial subdivision is Laguna for 20
years. The lease started in 2005. The rental rate is P1,000,000 per year. Corp. D
constructed buildings of the land but the buildings will be turned over to the
land owner upon expiration of the lease contract. As of the data of appraisal,
2010, the value of the buildings is estimated at P8,500,000, the prevailing
capitalization rate is 6%, the prevailing rental rate for similar land is
P1,200,000, and the remaining life of the buildings is 35 years. Determine the
Lesee’s Interest.
Given Data:
Appraisal date is 2010
Lease Period is 20 years
Remaining Life of Lease Contract is 15 years
Contract Life Ratio is 15 years / 20 years or 75%
Capitalization Rate is 6%
Contract Rent is P1,000,000 per year
Market Rent is P1,200,000 per year
Rental Gain is P200,000 per year
Value of Buildings is P8,500,000
Comprehensive Real Estate Appraisal Seminar and Training (CREASAT) RTPunzalan, CPV
COMPUTATION:
LESSEE’S INTEREST = NET PRESENT VALUE (NPV) OF RENTAL GAIN + LEASEHOLD VALUE OF
IMPROVEMENTS (BUILDINGS)
Comprehensive Real Estate Appraisal Seminar and Training (CREASAT) RTPunzalan, CPV
EXERCISE No. 1:
A retail space is rented out by its owner to a merchandiser at P40,000 per year. The
lease contract is for 5 years with a remaining life of 3 years. The tenant pays the
lease every first day of the year. Similar retail spaces in the area have a prevailing
rental rate of P46,000 per year.
Assuming a capitalization rate of 10% per year and the value of the retail space is
estimated to be P2,400,000 after 3 years, compute the Leased Fee and Leasehold
Fee.
EXERCISE No. 2:
Assuming a capitalization rate of 10% per year, compute the Leasehold Fee.
Comprehensive Real Estate Appraisal Seminar and Training (CREASAT) RTPunzalan, CPV
EXERCISE No. 3:
Mr. Cruz rented out his land to Mr. Reyes for P100,0000 per year for 5 years subject
to 10% increase in rental every year. Mr. Reyes constructed a small building on the
lot, which as agreed with Mr. Cruz, the ownership shall be transferred to Mr. Cruz
at the end of the lease agreement.
Assuming a capitalization rate of 10% per year and the values of the land and the
building are estimated to be P640,000 and P500,000, respectively at the end of the
lease , compute the Leased Fee.
EXERCISE No. 4:
Company A is leasing a commercial space for P50,000 per month. Included in the
lease agreement, is that Company A will pay additional rental of 3% for gross sales
revenue in excess of P100,000 per month. Last year Company A, had a gross sales
revenue of P2,360,000. How much rental was paid by Company A?
Comprehensive Real Estate Appraisal Seminar and Training (CREASAT) RTPunzalan, CPV
Comprehensive Real Estate Appraisal Seminar and Training (CREASAT) RTPunzalan, CPV
Comprehensive Real Estate Appraisal Seminar and Training (CREASAT) RTPunzalan, CPV
Comprehensive Real Estate Appraisal Seminar and Training (CREASAT) RTPunzalan, CPV