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Don't get fixed on the Cornwell park rental calculations
There are various formula's
One of mine has "a fair market rental" others are based on 5pc of the unimproved site value
Yeah - I saw later mention that Cornwall was 5% too.
5% doesn't sound unreasonable.
The thing I don't understand is, 7% isn't exactly an outrageous return. If too significant a drop is required, they could sell the land and invest elsewhere. Or raise a mortgage on the land, and invest the proceeds.
7% is a good return and I think it's fixed in the trust docs.
I don't think they can sell the land to invest elsewhere - once again the trust has been set up so those houses will fund the park.
The big problem is what land value should they use for the 7% calculation?
The easy solution is to use neighbouring freehold land values - typically $1m - $1.5m.
This results in the $70k - $90k annual leases.
A better solution is to use the land value of the actual leasehold properties.
This can be obtain from previous sales of these leasehold properties.
Ms Chen bought her property for $450k.
The land/improvements ratio values for these properties is 2/3 land to 1/3 improvements so the land was worth $300k.
Multiply $300k by 7% and you get $21k which I think would be a fair and workable lease amount.
So a simple solution is available.
The land/improvements ratio values for these properties is 2/3 land to 1/3 improvements so the land was worth $300k.
Multiply $300k by 7% and you get $21k which I think would be a fair and workable lease amount.
So a simple solution is available.
But that's the rub isn't it?
Throughout Auckland houses have gone up in value because the land has increased in value.
Especially large section is good areas.
So the 2/3 1/3 ratio doesn't work now - that is why the land is worth so much more.
Of course the greedy land owner should alturistic and have a low rent to help people out just like the greedy land lords should.
It's the last time I'm going to try this argument Bob, as you simply aren't seeing what I am so I feel like I'm wasting my energy posting it, but I'll give it one more go.
A better solution is to use the land value of the actual leasehold properties. This can be obtain from previous sales of these leasehold properties.
Ms Chen bought her property for $450k.
The land has never been sold. $450k was paid for the buildings on the land, and the right to use the land for a rental of (at the time) $8k per year, with periodic reviews.
$450k is not, and never has been, the price paid for "the property".
The land/improvements ratio values for these properties is 2/3 land to 1/3 improvements so the land was worth $300k.
A false calculation, as I mentioned above. But assuming it wasn't, your argument is circular, you're using the nearby properties as guides for land to improvements value - how is that ok, when you can't use nearby properties to get the land value?
Multiply $300k by 7% and you get $21k which I think would be a fair and workable lease amount. So a simple solution is available.
Far from simple, as I've mentioned above. Then on top of the circular argument is the circular calculation. At $21k annual lease, the property may sell for a lot more than $450k, so the lease goes up accordingly? Then the price goes down again because the lease is higher. Certainly doesn't seem simple to me. Much simpler to just use X% of the land value, which is easily established by looking nextdoor.
$450k is not, and never has been, the price paid for "the property".
Yes it is exactly what has happened. They paid for the freehold interest in the building and the leasehold interest as it were, in the land. It is a far better way to assess the value of the lease as Bob points out.
Yes it is exactly what has happened. They paid for the freehold interest in the building and the leasehold interest as it were, in the land. It is a far better way to assess the value of the lease as Bob points out.
So the land value should be set by something that doesn't include the land?
As Anthony suggests - a bit circular!
It does include the leasehold interest in the land.
Yes it does - as Anthony pointed out the value of the 'house' is related to the lease cost which is related to the land cost. To make this then related to the 'property value' brings you full circle.
The land value is related to the return it can get - the lease value.
But it is under pinned by the inherent unimproved value of the land as a residential section.
Yes it does - as Anthony pointed out the value of the 'house' is related to the lease cost which is related to the land cost. To make this then related to the 'property value' brings you full circle.
The land value is related to the return it can get - the lease value.
But it is under pinned by the inherent unimproved value of the land as a residential section.
The puzzling question I have for you Wayne is why do not more investors buy just the land?
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