In general, the word ‘leasehold’ means the value or right owned by tenants, under lease agreements which will be different from the value of the landlord or owner.
The leasehold value usually arises with long-term lease agreements in which the first payment sum or ‘upfront’ has already been paid to the landlord. As for the short-term lease, it will probably be just a deposit or insurance, followed by the rental fee in installments at the market rate. Therefore, there is no leasehold value for a short-term lease agreement.
The leasehold value can occur in 2 main factors which are:
- The first payment sum or upfront has been paid which causes the remaining lease payment that must be paid in installments lower than normal market rent.
- Development of construction of a building on the leased land which is owned by the tenant.
Then what will be the value of the owner or the landlord?
This depends on many factors that specify terms and conditions on the contract. Usually, when the owner has rented out the property, they will only receive an income as a rental fee in each installment according to the contract and will be able to have full ownership again once the contract expires. Therefore, the value of the lessor which also can be called “Value to the Owner” will be equal to the price of the property on the expiration date as stated in the lease agreement plus the rental income under the contract which is the future value of the cash flow, by using ‘discount’ to be the present value will result in the value of the owner regardless of whether transferring his/her ownership until the expiration of the lease.
The required documents in leasehold valuation are main/sub-lease agreements, building plans, title deed, etc.