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# Valuation of Lessee’s Interest

Valuation of Lessee’s Interest

Lessee is a person who rents an asset for use from a lessor that is leased under an agreement

A lessee can be either an individual or a legal entity

In case of capital leases, the lessee is also the debtor to the lessor

When real estate is leased, the lessee is called a tenant

Lessee’s Covenant

1) Payment of building tax

2) building insurance

3) repairs and unkeep of property

4) timely payment of lease rent

points to be considered for lessee’s interest

1) Capitalised value of net rental income receivable from the building, for unexpired period of lease

As lessee would lose the building on maturity, provision for recoupment of capital invested in building should also be made by selecting duel rate table

2) if the plot is not fully developed but is underutilized, in such cases, the lessee would also hold interest equivalent to the present worth of unutilized fsi land

Data

1) land 1800 sqm

2) year 1976

4) lease period 95 years renewable for further 95 years

5) lease rent Rs 1/year

6) lessee construct building 950 Sqm in 1976

7) lessee shall pay 10% of unearned increase in land value to lessor

8) replacement cost at year 2015 is Rs 15000/sqm

9) land value for year 2015 is Rs 5000/sqm

solution

lessors interest in land value would be restricted to claim of 10% unearned increase in land value

Unearned increase

= 1800 X (5000-400)

= Rs 82,80,000.00

Value of lessors right at 10% = Rs 8,28,000.00

value of lessee’s interest

Total value of land on year 2015

= 1800X5000

= Rs 90,00,000.00

Valuation of lessee’s interest = Rs 81,72,000.00

Replacement cost for year 2015

950 Sqm X Rs 15000/sqm

= Rs 1,42,50,000.00

Depreciation for 39 years

With 10% salvage value

= 0.9 X 1,42,50,000 X (39/60)

= Rs 83,36,250.00

Depreciated value of building in 2015

= Rs 59,13,750.00

Value of Lessee’s interest = Rs 1,40,85,750.00

Data

1) land area 1500 sqm

2) lease on year 1970

3) lease period 70 years

4) lease rent Rs 4000/year

5) sublease rent Rs 50000/year

6) after maturity building will vest to lessor free of cost

7).rent control act applicable to tenant

solution

Lessee has Right to receive house rent for 25 years only, as lessee would lose rental income after maturity

R = 8%

r = 4%

n = 25

S = r / {(1+r)n – 1} = 0.024

YP = 1 / (R + S) = 9.614

Value of lessee’s interest

= 50000 X 9.614

= Rs 4,80,700.00

Data

1) lease year 1985

2) lease period 35 years

3) lease rent Rs 40000/year

4) net income 2015 is

Rs 350000/year

solution

Value of lessee’s interest to run cinema and earn income for 5 years more

As this income would cease after 5 years

R = 12%

r = 4%

n = 5

S = r / {(1+r)n – 1} = 3.27

Value of lessee’s interest

= 350000X3.27

= Rs 11,44,500.00

Lease types

1) Building lease (open land leased for development)

2) Occupational lease (land with building is leased)

3) Sub lease

4) Lease for life (lease cotrminous with life of lessee)

Compiled by

Avinash kulkarni

Chartered Engineer, Govt Approved Valuer

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