Lease Buyback

Charlie bought his condominium unit new for $500,000 fifteen years ago. Since he has retired
from his job, Charlie is considering the lease buyback scheme now offered by the original
condominium project developer. Under the base option in this scheme, Charlie will receive a
fixed monthly payout from the company for 20 years. In exchange, ownership of the propert
reverts back to the company at the end of the 20 years. The developer intends to redevelop
the whole project after that.

The current market price for his unit is $600,000. Considering the current global economic
situation, Charlie thinks that this is below its true long-run trend valuation and thus should
not be used as the basis for the scheme's calculation. He estimates that new condominium
property prices should increase at an average 3% per year and existing property prices
depreciate "linearly" until they reach zero at the end of a 99-year tenure.

The scheme also allows property owners to take up the scheme up to 5 years later and for
payback durations of 15 or correspondingly fewer years. Charlie is considering signing up for
the scheme 5 years from now for the shorter 15-year payout duration.

This exercise was written as a basis for class discussion. It illustrates neither the effective nor ineffective
management of the given situation. Data provided may be entirely hypothetical.

LeongTY 493131568.xlsx/Home
 Lease Buyback © 2009 Leong Thin Yin. All rights reserved.

Change Rate (/yr) Tenure (yr) Lease Buyback Duraton (yr) Return Rate (/yr)
Property 3.0% 99 Scheme 20 2.0%
Year New 99-yr Years Depreciated Depreciated Lease Buyback
Property Price Remain Property Value Future Value Monthly Payout
0 $500,000
1
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LeongTY 493131568.xlsx/Proto
 Lease Buyback © 2009 Leong Thin Yin. All rights reserved.

Change Rate (/yr) Tenure (yr) Lease Buyback Duraton (yr) Return Rate (/yr)
Property 3.0% 99 Scheme 20 2.0%
Year New 99-yr Years Depreciated Depreciated Lease Buyback
Property Price Remain Property Value Future Value Monthly Payout
46
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LeongTY 493131568.xlsx/Proto
 Lease Buyback © 2009 Leong Thin Yin. All rights reserved.

Change Rate (/yr) Tenure (yr) Lease Buyback Duraton (yr) Return Rate (/yr)
Property 3.0% 99 Scheme 20 2.0%
Year New 99-yr Years Depreciated Depreciated Lease Buyback
Property Price Remain Property Value Future Value Monthly Payout
92
93
94
95
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99

LeongTY 493131568.xlsx/Proto
 Lease Buyback © 2009 Leong Thin Yin. All rights reserved.

Change Rate (/yr) Tenure (yr) Lease Buyback Duraton (yr) Return Rate (/yr)
Property 3.0% 99 Scheme 15 2.0%
Year New 99-yr Years Depreciated Depreciated Lease Buyback
Property Price Remain Property Value Future Value Monthly Payout
0 $500,000 99
1 515,000 98 $509,798 $672,680 $3,208
2 530,450 97 $519,734 $684,513 $3,264
3 546,364 96 $529,807 $696,450 $3,321
4 562,754 95 $540,017 $708,487 $3,378
5 579,637 94 $550,362 $720,620 $3,436
6 597,026 93 $560,843 $732,843 $3,495
7 614,937 92 $571,457 $745,151 $3,553
8 633,385 91 $582,202 $757,538 $3,612
9 652,387 90 $593,079 $769,998 $3,672
10 671,958 89 $604,084 $782,523 $3,731
11 692,117 88 $615,215 $795,107 $3,791
12 712,880 87 $626,471 $807,741 $3,852
13 734,267 86 $637,848 $820,419 $3,912
14 756,295 85 $649,344 $833,129 $3,973
15 778,984 84 $660,956 $845,864 $4,033
16 802,353 83 $672,680 $858,613 $4,094
17 826,424 82 $684,513 $871,366 $4,155
18 851,217 81 $696,450 $884,112 $4,216
19 876,753 80 $708,487 $896,838 $4,276
20 903,056 79 $720,620 $909,531 $4,337
21 930,147 78 $732,843 $922,179 $4,397
22 958,052 77 $745,151 $934,768 $4,457
23 986,793 76 $757,538 $947,282 $4,517
24 1,016,397 75 $769,998 $959,705 $4,576
25 1,046,889 74 $782,523 $972,021 $4,635
30 1,213,631 69 $845,864 $1,031,344
40 1,631,019 59 $972,021 $1,129,366
50 2,191,953 49 $1,084,906 $1,172,825
60 2,945,802 39 $1,160,467 $1,112,597
70 3,958,911 29 $1,159,681 $872,222
80 5,320,445 19 $1,021,096 $334,912
90 7,150,234 9 $650,021 $0
99 9,329,433 0 $0 $0

LeongTY 493131568.xlsx/Model
 Comments
1. The estimated long-run current value of the condo unit is $660,956.
2. Monthly payout if the scheme is adopted now (at 15 years) for a 20-year payout duration is $3085.
3. Monthly payout if the scheme is adopted now (at year 20) for a 15-year payout duration is $4337.
4 .Recommendation: Hold back later if he can since the property value is giving a good return.

Documentation
Price change rate (/yr) C4 <Input>
Property tenure (yr) D4 <Input>
Scheme duration F4 <Input>
Scheme return rate (/yr) G4 <Input>
Year B7 <Input>, 0, 1, 2, …
Property price C7, C8 <Input>, =C7*(1+$C$4)
Remaining tenure (yr) D7 =$D$4-B7
Depreciated property value E8 =$C8*$D8/$D$4
Depreciated future value F8 =OFFSET(E9,$F$4,0)
Scheme monthly amount G8 =PMT($G$4/12,$F$4*12,,-F8)

LeongTY 493131568.xlsx/Model
ration is $3085.
ation is $4337.

LeongTY 493131568.xlsx/Model