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How to calculate land lease value

Historically, land lease has been called ground lease or building lease. It involved landowners granting long term leases to developers which would allow them to construct buildings and properties on the land in return for a share of the income.

This meant that the owner would be able to allow development on their land at no extra cost to themselves and receive a steady income flow over a long-term period, eventually gaining control of their land back at the end of the lease.

Traditionally, owners of land leases have been bodies, rather than individuals. These included the Crown Estate, the City of London, and the Church Commissioners.

This article will explore what a land lease means today, and how to calculate the value of one.

What is a land lease?

This is a long lease (typically 125 years or longer) that is granted by the freeholder, usually to developers, on a piece of land in return for ground rent and upfront payment. Once the lease is over, rights of the land and buildings return to the freeholder.

Key terms: Long leaseholder and freeholder

A long leaseholder will own the building and pay ground rent to the freeholder while they receive rent from any commercial occupiers.

Meanwhile, a freeholder (the land lease owner) will own the land and receive ground rent from the long leaseholder.

What is the difference between leasehold interest and ground rent?

As mentioned earlier, ground rent is paid by the long leaseholder to the freeholder for the use and development of the land. It is usually calculated as a percentage (5-10%) of the income from the land and any buildings.

Generally, this is increased periodically (every 5-21 years), to fit in line with market rental levels. However, if market rental levels fall, the ground rent will typically remain the same.

On the other hand, leasehold interest refers to a structure where a lessee leases the land from the freeholder for ground rent. The lessee will own any improvements (property and building developments, for example) on the land.

What are the key benefits of calculating land lease value in the UK?

When you calculate the lease value of your land through a professional valuation, you are giving yourself a greater idea of what you can charge in terms of ground rent and ground lease investments. This not only affords you a greater degree of control but helps you to understand the fluctuations in valuation.

However, because the grant of a lease is part disposal, you may be liable for income tax.

What affects the calculation of land lease value?

There are many influences on land lease value. These include:

• The square size of the land

• The location of the land

• The leasehold net rentable area

• The current net operating income

• The market cap rate for the property

If there is already a land lease on the land and you are looking to calculate the land lease value after the land is returned, these factors will influence your final value:

• The start of the ground lease

• The length of the ground lease

• The next ground lease payment

• Any initial payments and their amounts

• The increase in ground rent (calculated through either percentage or amount increase)

• The frequency of ground rent increase

• The frequency of ground rent payment

• Any re-tenanting costs on the return of land

• The reversion growth rate calculated for inflation

• The ground lease PV valuation and leasehold valuation

How to calculate land lease value

You can find virtual valuation models online from trusted servicers. Per licence, most models can be found between £100 and £200.

It’s always better to hire a professional to have your land lease valued. NFC Homes is a residential and commercial property development group based in London and operating nationwide, offering support to land lease enquiries and clients. NFC Homes have successfully delivered more than 1,500 new homes and commercial developments for more than 15 years.

For more information about calculating the lease value of your land, or if you'd like to explore your options when it comes to selling land, get in touch with our dedicated customer service team today and we’ll be able to help.


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