The economics of extending a lease

economic

GreatApe wrote: »

Yes due to Brexit the shares are trading below book value,

They have announced a £300 million buyback after having sold one of their properties for more than book value. Anyway this wasn't really about BLND.

You have a flat I believe, is the lease short by which I mean how many years left for it to get to the magic 80 year length? If so what do you make of the discussion about extending or not?

yes i was meaning to reply to this thread when i first saw it last night - sorry for the delay. ill be detailed as possible as there is quite a lot going on with leasehold extensions.

My current lease + share of freehold is over 150 years in length. i wont have to worry about the lease length in my lifetime. however if it were short then it would be "free" except for my share of legal costs to change the leases, as i own the share of freehold (actually a share in the company that owns the freehold) and each flat owner owns a share too so paying for a lease extension is like paying yourself.

My previous flat had a 90 year lease with a (current) £300 a year GR doubling every 25 years. I was thinking about extending it simply because i thought in the future it would be easier to sell. however i deicded to sell last year and 90 years was fine according to agents (my buyer actually extended it after he bought it - i passed on the 2 year rule over to him).

Keep in mind that if you go through the statuatory route in extending the lease, you will have to pay for both yours and the freeholders legal and survey costs. i think your 4k costs ontop of the 6k sounds about right for london. also keep in mind going through the statuatory route - how the surveys used to calculate the lease extension costs uses specific discount rates for the ground rent PV (which i believe is 7% - although could be wrong) and the deffered value of reversion PV (which i believe is 5% - although i could be wrong). so your conclusion that investing the money instead would be expected to return you more such that the flat value at the end of the lease is less then this invested amount is true (since you used a 5% real rate of return, and the discount rates under statuatory process are nominal rates). So your thinking process and assuming your assumptions are correct, it would be better to invest the money instead of extending the lease except if you know or even maybe look to extend the lease later (due to ease of selling the property down the line) then you need to watch out for marriage value once the lease becomes less then 80 years. if the lease goes under 80 years in length then you also have to pay this additional marriage value (you can look online how this is calculated) so this will have to be also a factor and depending when you extend, as time goes on there will be a time when the lease reaches x years when it would have been better to extend the lease then invest.

economic

sorry if above post sounds waffly. basically read up marriage value as well. if you ever change your mind and have to extend in future (maybe due to selling the property or as above posted said, remortgage) then you will have ot consider marriage value.

this marriage value does not rise linearly with reducing lease length. it looks expoential i believe. there are RICS graaphs availabble if you google. as there is something called "present relative value" used to calculate MV. The marriage value increases similar to exponential function. so you have to be careful if you change your mind about extending (your opportunity cost calc maybe says better to invest if lease is 75 years, but at 50 years it may say otherwise due to the present relative value). (note 50, and 75 are compeltely made up, just to use as example).

economic

google "RICS graphs of relativity", you should be able to get the graphs from there.