Valuation of Lessors Interest

Valuation of Lessors Interest

Lessor is the owner of an asset that is leased under an agreement to a lessee 

A lessor can be either an individual or a legal entity 

Lessor retains ownership of the property while generating a return on his invested capital 

Some lessors can also grant a “rent-to-own” least whereby some or all of the payments made by lessee will eventually be converted from lease payments to a down payment on the eventual purchase of lease item

points to be considered for lessors rights

1) total lease period and unexpired period of lease

2) whether lease is renewable for further term or on maturity of lease period the property will revert back to lessor? 

3) what is the covenant concerning status of building erected on plot

At the time of maturity of lease period, the building on plot will have to be demolished or retained or handed over to lessor?

4) what lease rent is payable by the lessee for use of land and whether there is a provision for periodical increase in lease rent? 

5) in case of lease renewal, what will be the lease rent for the second period of lease? Same or based on prevalent market rent on maturity date? 

6) if on the maturity building vests to lessor, will it be free of cost or depreciated cost of building? 

7) what amount is payable to lessor (unearned increase premium) in case of transfer/assignment of the property during lease period? 

unearned premium calculation

Divide the premium by the total number of periods in the term

Unearned Premium

It is the premium corresponding to the time period remaining on an insurance policy 

These are proportionate to the unexpired portion of the insurance and appear as a liability on the insurers balance sheet since they would be paid back upon cancellation of the policy

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) 

Value of Lessors interest

1) capitalized value of ground rent income receivable for unexpired lease period

2) present value of right of reversion of the property (land or land with building) at the expiry of lease period

calculations of fair and reasonable lease rent for lessor


1) plot area 1200 sqm

2) least period 99 years

3) freehold plot rate Rs 5000/sqm

4) premium expected Rs 2000/sqm

5) renewable after 99 years at mutually agreed revised rent


1) premium amount Rs 2400000.00

2) balance investment amount Rs 3600000.00

*lessor is eligible to charge lease rent on the balance investment at the yield rate prevalent in the locality*

3) Yield rate 8%

4) fair and reasonable lease rent

Rs 288000.00/year or

Rs 24000.00/month

renewal clause lease agreement

1) lessor is not free to lease property to third party but is bound to renew lease with the sitting lessee only if lessee is ready and willing to pay reasonable rent

2) there are no competing tenants in the market

3) land offered for lease renewal is encumbered with the structure erected by lessee

4) land value to lessor on renewal date is less. It’s present worth is only deferred value of land and not full value as if freehold. 

5) lower yield rate than market yield rate has to be considered because of closed market and bounded duty of lessor for renewal 


1) plot area 8750 sqm

2) lease date 1972

3) lease period 40 years

4) lease rent for first lease period Rs 30000/year

5) lease renewal 30 and 29 years

6) on maturity of lease period of 99 years, property vest to lessor free of cost


1) after end of 40 years

ie in year 2012

Prevalent land rate Rs 15000/sqm

2) land value is year 2012

Rs 131250000.00

3) lessor is bound for two more renewal 

4) hence total value of land in year 2012 has to be differed for 59 years at 6%

5) present worth of land (deferred value of land in 2012)

= Rs 131250000 X. 0321

= Rs 42,13,125.00/year

6) revised lease rent for second period of 30 years at 6% of value

= Rs 4216125 X 0.06

= Rs 2,52,787.00/year

7) allowing 25% rebate for renewal compulsion

Revised lease rent in year 2012

= 0.75 X Rs 252787

= Rs 1,89,590.00/year

Say Rs 1,90,00.00/year


1)plot area 2000 sqm

2) built-up area 1200 sqm

3) lease year 1975

4) lease period 40 years

5) prevalent land rate in year 2012 is Rs 8000/sqm

6) replacement cost for year 2012 is Rs 9500/sqm

7) no renewal clause

8) maturity of lease period property vest to lessor free of cost

solution for lessors interest

1) value of lease rent income for 3 years or derived by capitalising income at 7%

2) capitalized rental value

= Rs 40000 X 2.684

= Rs 104960.00

3) value of land for year 2012 

= Rs 16000000.00

4) value of building 

1200 Sam X Rs 9500/sqm

= Rs 11400000.00

5) depreciation for 37 years assuming 10% salvage value

= Rs 114000000 X 0.9 X (37/60)

= Rs 6327000.00

6) net value of building 

Rs 5073000.00

7) Total value of property

Rs 21073000.00

8) Differing value at 7% for 3 years period

Recessionary value of property 

= Rs 21073000 X 0.8163

= Rs 17201890

9) total value of lessors interest

Rs 17306850.00

Compiled by :

Avinash kulkarni 

Chartered Engineer, Govt Approved Valuer

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