Land & Building Method

A person purchased a vacant plot of land measuring 2160 sq. ft. in a developing residential
area and constructed a single storied RCC frame structure residential type building having
covered area 1000 sq. ft. in the year 2000.
Prevalent land price in the locality at present Rs. 1,000/- per sq. ft. and plinth area rate of
similar building including utilities is at Rs. 1,500/- per sq. ft..
Calculate present market value of the house property.
Assume total economic useful life of the building 75 years and salvage value 10%
Purpose of valuation is for bank finance

Solution

Land and Building Method (Cost approach) is adopted. Market value of land and
replacement cost of building is worked out and added to arrive at present market value of
the property

1. Market value of land having area 2160 sq. ft. : 2160 x Rs. 1,000/- = Rs. 21,60,000/-
@ Rs. 1,000/-

2. Replacement cost of building having covered area: 1000 x Rs. 1,500/- = Rs. 15,00,000/-
1000 ft. @ Rs. 1,500/-

3. Depreciation of building adopting Straight Line Method : (100 – 10) x 18/75 = 21.6%

4. Depreciation amount : 0.216 x 1000 x Rs. 1,500/- = Rs. 3,24,000/-

5. Depreciated value of building : Rs. 15,00,000/- - Rs. 3,24,000/- = Rs. 11,76,000/-

6. Present market value of the house property : Rs. 21,60,000/- + Rs. 11,76,000/-

= Rs. 33,36,000/-
Depreciation

- Cost of asset = P = 20,000

- Assessed life = n = 9 years
- Residual value = S = 2,000

Straight Line Method

Depreciation (fixed throughout the period) i.e. D= (P - S) / n

Amount of depreciation = (Rs. 20,000 – Rs. 2,000) /9 = Rs. 2,000

Rate of depreciation = 2,000/20000 = 10%

Reducing Balance Method (Income Tax Rules prescribe this, except ships)

Depreciation is charged at a fixed percentage on the reducing balances of the assets

i.e. D = 1 – (S / P) = 1 - (2000/20000) = 0.225 = 22.5%

Depreciation for the 1st year = .225 x 20000 = 4500

Book value at the end of 1st year = Rs. 15,500

Depreciation for the 2nd year = .225 x Rs. 15,500 = 3487.5

Book value at the end of the 2nd year = 12,012.5 and so on ….

Sinking Fund Method (In leaseholder’s interest )

Depreciation is provided in this Method as a fixed periodic charge which aggregated

with compound interest over the life of the assets

Depreciation is provided in this Method as a fixed periodic charge which aggregated

with compound interest over the life of the assets

Capital value of asset = P = Rs. 20,000

Annual Sinking Fund = A.S.F. = r / (1+r)n – 1 = 0.05/ (1.05) 9 -1 = 0.05 / 0.5513 = 0.0906
Amount of depreciation for Rs. 20000 = Rs. 20,000 x 0.906 = 1,814
Yield

1. A property has given net amount return of Rs. 40,000/- out of investment Rs. 5 lakhs. The
investor borrowed Rs. 3 lakhs @ 9.5% per annum. What is the yield of investor’s equity?

- Interest Amount : Rs. 3,00,000 x 9.5 /100 = Rs. 28,500/-

- Net Annual Return – Interest on loan = Rs. 40,000/- - Rs. 28,500/- = Rs. 11,500/-
- Yield = Net Annual Return / Investor’s Equity = (11,500 x 100) /Rs.2,00,000 = 5.75%

2 A commercial property has given net amount return of Rs. 3 lakhs . It was purchased at
Rs. 30 lakhs. The investor has borrowed Rs. 20 lakhs @ 9% per annum. What is the
yield of investor’s earning?

- Net amount return : Rs. 3,00,000

- Interest accrued on loan : Rs. 20,00,000/-@ 9% = Rs. 1,80,000/-
- Net Annual income = Rs. 3,00,000/- - Rs. 1,80,000/- = Rs. 1,20,000/-
- Yield = Net Annual Return /Investor’s Equity= (1,20,000 x 100) /Rs. 10,00,000 = 12%

Now investor further apply Rs. 5 lakhs and net amount return becomes double in
amount. What is the net yield?

- Return becomes doubled i.e. Rs. 3,00,000/- x 2 = Rs. 6,00,000/-.

- Interest accrued = Rs. 1,80,000/-
- Actual net return : Rs. 6,00,000/- - Rs. 1,80,000/- = Rs. 4,20,000/-
- Investor’s present equity : Rs. 10,00,000/- + Rs. 5,00,000/- = Rs. 15,00,000/-
- Yield = (Rs. 4,20,000/- x 100) / Rs. 15,00,000/- = 28%
Premium
A shop is worth Rs. 60,000/- p.a.. The freeholder, however is unwilling to let it rack rent, but
wishes to reserve a premium from an intending lessee desires of taking the premises on a
21 years lease. What is the amount of the premium which would be equivalent to a
reduction of Rs. 1,275/- p.m. in rent?

- Rack Rent : Rs. 60,000/- p.a.

- Deduct : Rs. 1,275 x 12 = Rs. 15,300/- p.a.
- Reduced rent : Rs. 44,700/- p.a.

Tenant’s point of view :

- Present rental value : Rs. 60,000/-

- Rent to be paid: Rs. 44,700/- p.a.
- Profit rent : Rs. 15,300/- p.a.
- Y.P. 6 ½% & 2 ½% for 21 years : 9.824
- Gain to lessee : Rs. 1,50,307/-

Landlord’s point of view :

Present position

- F.R.V. : Rs. 60,000/- p.a.

- Y.P. @6% in perpetuity : 16.67*
- Value : 10,00,200/-

Proposed position

- Term Rent : Rs. 44,700/- p.a.

- Y.P. 6% for 20 years : 11.764*
- Value of Term : Rs. 5,25,851/-
- Reversion to F.R.V. at Rs. 60,000/-
- Y.P. in perpetuity @ 6% deferred 21 years : 4.902
- Value of Reversion : Rs. 2,94,120/-..
- Value of proposed position : Rs. 5,25,851/- + Rs. 2,94,120/-..= Rs. 8,19,971/-
- Loss to freeholder : Rs. 10,00,000/- - Rs. 8,19,971/- = Rs. 1,80,229/-
- Premium should be fixed somewhere between Rs. 1,80,229/- Rs. 1,50,307/-,
depending upon bargaining power of parties, say at Rs. 1,65,000/-
Annual Equivalent of capital investment
A lessee took on lease for 30 years a shop property. Immediately on taking of the lease he
expended a capital sum of Rs. 30,000 on the improvement of external appearance of the
shop. What is the annual equivalent (A.E.) of the capital expenditure assuming interest on
capital 6%

Solution

A.E. = Capital / Y.P. 30 years @ 6% x 2 ½ % = Rs. 30,000/12.08 = Rs. 2,483

True Rental Value & Virtual Rent

12 years ago A took a lease of a house for 21 years at a rent of Rs. 250 per month and paid
a premium of Rs. 12,000. 6 years later he added a garage at a cost of Rs. 30,000.
(assume return at 7% in all cases & sinking fund 2 ½% ).

Estimate –

a) True Rental Value & b) Virtual Rent, both at the grant of the lease & at the present day

Solution

True Rental value (T.R.V.) at the grant of lease

A.E. of premium (landlord’s point of view) = Rs. 12,000 / Y.P. 21 years @7%
= Rs. 12,000/10.836 = Rs. 1,107

T.R.V. = A.E. + Rent Reserved = Rs. 1,107 + 12 x Rs. 250 = Rs. 4,107

True Rental value (T.R.V.) at the present day

Return on capital = 0.07 x Rs. 30,000 = Rs. 2,100

Therefore, T.R.V. at the present day = Rs. 4,107 + Rs. 2,100 = Rs. 6,207 p.a.

Virtual Rent = Rent Reserved + A.E. of Premium

= Rs. 3,000 + Rs. 12,000 / (Y.P. @ 7 ½ % x 2 ½ for 21 years)

= Rs. 3,000 + Rs. 12,000/8.946 = Rs. 3,000 + Rs. 1,341 = Rs. 4,341

A.E. of Rs. 30,000 = Rs. 30,000/ Y.P. @ 7 ½ % for 15 years = Rs. 30,000/7.647
Virtual Rent at the preset day = Previous Virtual Rent + A.E. of Rs. 30,000 =
= Rs. 4341+rs. 3,923 = Rs. 8,264
Present Value

A person will receive Rs. 2 lakhs after 5 years from investment and again Rs. 1 lakh
2 years thereafter. What is the present value of the receivable today? Assume rate of
interest 6%

P.V. = 1/1+r) n where r = interest & n = no. of years or from valuation table

- P.V. of Rs. 1 lakh for 2 years @ 6% : 0.89* x Rs. 1 lakh = Rs. 89,000/- (*from table)
- Amount to be received after 5 years = 2,00,000 + 89,000/- = Rs. 2,89,000/-
- P.V. of Rs. 2,89,000/- today @ 6% : Rs. 2,89,000/- x 0.7473* = Rs. 2,15,970/-

Reversion

1. The lessor of a property receives a net rent of Rs. 9,000/- p.m.. On expiry of the lease
after 20 years, he will have Reversion to the property of Capital Value Rs. 10 lakhs. What
is the value of the property to day? Assume rate of return 7% p.a.

- Annual Rent : Rs. 9,000/- x 12 = Rs. 1,08,000/-

- Y.P. @ 7% p.a. for 20 years = 10.594* (from table)
- Term Value : Rs. 1,08,000/- x 10.594 = Rs. 11,44,152/-
- P.V. of Re. 1 @ 7% deferred 20 years : 0.2584*
- Reversion Value of RS. 10 lakhs : 0.2584 x X Rs. 10,00,000/- = Rs. 2,58,400/-
- Total Value : Term Value + Reversion value = Rs. 11,44,152/- + Rs. 2,58,400/-
= Rs. 14,02,552/-

2. A freeholder gave lease for 20 years in 2008 at a rent of Rs. 1,000/- p.m.. Present
market rent is Rs. 4,000/- p.m.. What is value of freeholder & leaseholder interest today?

Freeholder’s interest
Term value
- Unexpired period of lease : 10 years
- Lease rent receivable for 10 years unexpired period = Rs. 12,000/- p.a.
- Value assuming Y.P. 6% for 10 years : Rs. 12,000/- x 7.360* = Rs. 88,320/-

Reversionary Value

After 10 years freeholder will receive full rental value of Rs. 4,000/- p.m. or Rs. 48,000/-
p.m. in perpetuity

- Value assuming Y.P. 6 ½ % in perpetuity : Rs. 48,000/- x 15.385* = Rs. 7,38,480/-

- P.V. of Re. 1 @ 6 ½ % deferred 10 years : Rs. 7,38,480/- X 0.5327* = Rs. 3,93,388/-

- Value of freeholder’s interest : Term Value + Reversion value

= Rs. 88,320/- + Rs. 3,93,388/- = Rs. 4,81,708/-

Leaseholder’s interest

- Full Rental Value : Rs. 48,000/- p.a.

- Less Lease Rent : Rs. 12,000/- p.a.
- Profit Rent : Rs. 48,000/- - Rs. 12,000/- = Rs. 36,000/- p.a.
- Y.P. @ 7% & 3% (allowing sinking fund to redeem capital) dual rate : 6.360*
- Present value of leaseholder’s interest : Rs. 36,000/- x 6.360 = Rs. 2,28,960/-
Merger Value

Lessor receives a net rent of Rs. 10,000/- p.a. from his property. Unexpired period
of lease is 14 years. Present market rent of the property is Rs. 45,000/-. What
is the value of the property to day? Assume rate of return 9% p.a.

Freeholder’s Interest
Term value

- Annual Rent : Rs. 10,000/- p.a.

- Unexpired period of lease : 14 years
- Y.P. @ 9% p.a. for 14 years = 7.786* (*from table)
- Term Value : Rs. 10,000/- x 7.786 = Rs. 77,860/-

Reversion value

- Y.P. @ 6% in perpetuity : 16.67* (from table)

- Value : 45,000/- x 16.67 = Rs. 7,50,150/-
- P.V. of Re. 1 @ 6% for 14 years : 0.4423* (from table)
- Reversion value : Rs. 7,50,150/- x 0.4423 = Rs. 3,31,790/-
- Total Value : Term + Reversion = Rs. 3,31,790/- + Rs. 77,860/- : Rs. 4,09,600/-

Leaseholder’s Interest

- Fair Rental value (F.R.V.) : Rs. 45,000/- p.a.

- Lease Rent : Rs. 10,000/- p..a.
- Profit Rent : Rs. 45,000/- - Rs. 10,000/- = Rs. 35,000/-
- Y.P. @ 6 ½% & 3% (Dual Rent ) for 14 years : 8.095
- Value : Rs. 35,000/- x 8.095 = Rs. 2,83,325/-

Offer Value In Merger of interest

- F.R.V. = Rs. 45,000/-

- Y.P. @ 6% in perpetuity : 16.67* (from table)
- Value : Rs. 45,000/- x 16.67 = Rs. 7,50,000/-
- Deficit of interest : Rs. 7,50,000/- - (2,83,325/- + Rs. 4,09,600/-) = Rs. 1,14,650/-
- Average of deficit interest : Rs. 1,14,650/- /2 = Rs. 57,325/-
- Freeholder’s offer value : Rs. 2,83,325/- + Rs. 57,325/- = Rs. 3,40,650/-

Development Method

 A developer is desired to purchase a landed property measuring 16000 sft. for a multi
- storied building development. Current Market rate of floor space of similar buildings
nearby is currently fetching a price of Rs, 4,000/- per sft. The construction cost is of
the order of Rs. 1,500/- per sft. on an average. The time schedule for completion of
the project is 2 years. What will be the cost of land suggested for Developer ?

 Permissible gr. coverage under municipal bye-laws is 50% & prescribed F.A.R. is 2.5
 Area of land : 16000 sft.
 Permitted floor area : 16000 x 2.5 = 40000 sft.
 Ground coverage : 16000 sft. x 0.5 = Rs. 8000 sft.
 No. of stories : 40000 / 8000 = 5
 Total floor area to be developed : 40000 sft.
 Carpet area (assuming 80% of floor area ) : 40000 x 0.8 = 32000 sft.
 Realisable Sale value of developed property: 32000 x Rs.4,000/-=Rs.12,80,00,000/-
 Deferring value @ 10% for 1 year** (**1/2 of realization of total sum period)
: Rs.12,80,00,000/- x 0.909* = Rs. 11,63,52,000/-
 Cost of construction (assuming 20% margin for utilities) : 1.2 x 40000 x Rs.1,500/-
= Rs. 7,20,00,000/-
 Architects fee @ 5% : Rs. 36,00,000/-
 Finance charge @ 10% over constructional cost & Architects fees for 1 year : Rs.
75,60,000/-
 Developer’s profit @ 15% over constructional cost & Architects fees
: Rs. 1,13,40,000/-
 Total outgoings : Rs. 9,45,00,000/-
 Land surplus : Rs. 11,63,52,000 - Rs. 9,45,00,000 = Rs. 2,18,52,000
 Let value of land = L
 Stamp duty & legal charges @ 10% (say) = 0.1 L
 Land surplus = land value+ stamp duty+ finance charge for 2 years @ 10% on land
& stamp duty) = 1.1 L x (1.1) 2
 Therefore, 1.331 L = Rs. 2,18,52,000
 Land value = L = Rs. 2,18,52,000/ 1.331 =
or land value per sq. ft. = Rs. 1,64,17,731 / 16000 = Rs. 1,026

Belting Method

A plot is to be valued of a trapezoidal shape having road frontage 40 ft., rear side 80
ft., depth 130 ft.. The value of a fairly comparison plot of rectangular shape having
area 6000 sft. of known value 10 lakhs

Solution

• 1st belt : 40 x 100 = 4000 sft. = 4 units (assume 1000 sft = 1 unit)

• 2nd belt (2/3rd value of 1st ) : 2/3 x 40 x 30 = 800 sft. = 0.8 units

• 1st belt recess (3/4th value of 1st ) : ¾ x2000 sft. = 1500 sft. = 1.5 unit

• 2nd belt recess (3/4th value of 2nd ) = ¾ x 2/3 x 1200 sft. = 600 sft. = 0.6 unit

• Total in units : 4 + 0.8+ 1.5 + 0.6 = 6.9 units

• Value of known plot of 6000 sft. = 6 units is 10 lakhs

• Value of plot 7800 sft. (6.9 units) in question: 6.9 x10/6 = 11.5 lakhs
Some factual statement (M.C.Q. related)

1. Real property market is a complex phenomenon

2. Real property may be increased by vertical development of land

3. Land and Building Method is also termed Summation Method

4. In Replacement Cost Method, calculate cost of similar asset offering equivalent utility

5. Reproduction Cost Method is applied, if a person seeking cost that would be incurred
by creating an exact replica of the subject

6. While transfer of property to lessee under lease, the lessor is not required to pay
capital gains

7. Economic life is how long it is anticipated that the asset could generate financial
Returns

8. Written Down Value Method and Reducing Balance Method are same

9. Building lease is the lease of land on a small ground rent and for the purpose of
erection of building

10. In Occupational lease both land building are given on lease

11. A leased property is normally valued by income approach

12. Valuation procedure for a freehold property and leasehold property with a perpetual
lease is not same

13. Capital value is net income multiplied by years purchase

14. Building leases may be of very long term say 99 years or 999 years

15. 99 years lease and above with renewal clause is called a perpetual lease

16. Lease for life is not common in India

17. Rack rent is the full rental value of the vacant property

18. Ground rent is the annual value of the bare site only reserved in a long building lease
19. Head rent is termed if more than one lease in a property exists

20. Rack rent minus ground rent minus outgoings is net profit rent for lessee

21. The rights of lessor or lessee depends upon conditions stipulated in the lease deed

22. Even in a perpetual lease, the lessee’s right will be low, if the unexpired period is less

23. Handing over of open land back to the lessor is called Reversion

24. When a liability of the outgoings shouldered by the tenant, the rent received by the
landlord is called the Net Rent

25. The word ‘’Covenant’’ indicates the terms and conditions stipulated in any deed

26. A man cannot grant a lease to himself

27. Perusal of lease deed is the first duty of a valuer if he value a leasehold property

28. A ‘’Deposit’’ is the amount which is returnable on fulfillment of certain conditions

29. The amount of Re 1 per annum is the reciprocal of the sinking fund

30. The rate of capitalisation in leasehold depends on money market from time to time

31. In money market higher the rate of capitalization,lower the value of asset & viceversa

32. Normally 1% higher or lower interest affects the value of the property more than 10%

33. Accumulative rate of interest is related to Sinking Fund, apply in dual rate working

34. Accumulative rate of interest is lower than Remunerative rate of interest

35. The rate of capitalisation for a leasehold interest in general is 1% more than the
freehold interest

36. The capital value of income can be determined from the net income and the
percentage return required on investment

37. A token amount or a nominal amount is called as a acknowledgement rent

38. If the unexpired period of lease is short, the value of lessor’s share will be more

39. If the unexpired of lease is very long, the value of lessee’s share will be more

40. Lessee is also termed as leaseholder

41. A leaseholder’s interest in a property will normally decrease with the passage of time
and ultimately extinguish with the expiry of lease
42. Longer period of lease enables the lessee to recover his capital invested in the
improvement of the land

43. Ground rent is well secured when improvement is done on the land given on lease

44. In the case of sublease, the proposed ground rent is normally higher than the original
ground rent

45. The provisions of terms of lease would decide the share value of lessor and lessee

46. When lessee’s interest is valued, dual rate table is normally to be used

47. When lessor’s interest is valued, single rate table is being used

48. In a perpetual lease with lease with covenant of renewal, the lessor cannot terminate
the lease or refuse to renew the same as long as the lessee do not violate any terms
specified in the lease agreement

49. Higher, the rate of capitalisation, lower is the value of the asset

50. Lower the rate of capitalistion, higher is the value of the asset

51. If tenancy term permits the person to make use of his given rented property for a
temporary period , then it is called license

52. A freehold property is the highest form of ownership

53. License and lease are not same

54. Leasehold property can be mortgaged by the leaseholders/lessee

55. Leaseholds are less attractive than freeholds from the investment point of view

56. A Rent is governed by Rent Control Act, License is governed by the Easement Act
and Lease is governed by the Transfer of Property Act

57. The sub lease can be granted only for a period which is less than the original period

58. A freehold property is the highest form of ownership

59. The owner of a freehold property can do anything with his property

60. The nature of occupation in a occupational lease may be residential or commercial

depending upon the type of property.

61. Occupational lease period are general duration of 7, 14 or 21 years

62. Virtual rent arises in case of lessee

63. Virtual rent is Rent reserved plus A.E. of premium

64. Virtual rent contains Sinking Fund and thus it should be more of True Rental Value

65. Premiums are always advantageous to landlord as these give him security of income

66. Leaseholds are less attractive to the investor than freeholds

67. Income from a leasehold interest in a particular class of property will usually be
capitalised at a higher rate percent that would be used for a freehold interest in the
same property

68. Obsolescence can effect land as well where the buildings do not adequately develop
the site

69. Functional obsolescence becomes curable if some additions and alterations can
pave the way adaption to proposed use

70. Functional obsolescence arises out of constraints in building uses

71. Technological obsolescence arises mainly due to fast changes in technologies &
innovation

72. If Years Purchase (Y.P.) is 10, then the Rate of Return is 10

73. Grid model and Hedonic Pricing Model are applied in Housing market

74. Grid model and Hedonic Pricing Model relates with Sales Comparison Method

75. Grid Model is more scientific than Hedonic Model

76. Belting method is best on the fact that lands in front more value than land in the back.

77. If 1st belt is at 100 ft., 2nd belt is generally taken at 1 and half times i.e. at 150 ft. and
value 2/3rd of 1st belt. 3rd belt value at 3/4th the 2nd belt or ½ of 1st belt

78. The recess land is valued at 3/4th of respective belt value

79. As per building bye-laws Basement used as car park is excluded in FAR

80. Minimum open car space as per parking standard is 18 m2

81. Minimum covered car space as per parking standard is 23 m2

82. Minimum basement car space as per parking standard is 28 m2

83. For group housing, the density pattern is taken per dwelling unit as 4.5

84. Covered area of building varies with the area of the plot/width of front road
85. Height of building varies with the area of the plot/width of front road

86. Minimum area of an independent plot for residential purpose normally is 540 sft
having frontage 18 ft. & depth 30 ft.

87. Normally Covered area is 50% of plot area when plot size is 500 m2 or more and
60% when plot size is 200 m2

88. Rent control is applicable for Tenanted property

89. Ownership rights in rent controlled properties cannot be transferred

90. The values of the Rent controlled properties will have a low market value

91. In Rent Controlled Act, the Fair rent is to be determined on date of petition

92. Rent Control Act formulated in 1948

93. Standard Rent is fixed by the court for the protected tenant under Rent Control Act

94. Transfer of Property Act formulated in 1882

95. Easement Act formulated in 1882

96. Formula for Amount (A) = P (1+i)n

(1+i) n – 1
97. Formula for Amount of Re. 1 = --------------
i

r
98. Formula for Annual Sinking Fund = --------------
(1+r) n -1

1
1 - --------
(1+i) n
99. Formula for Present Value of Re. 1 = --------------
i

1
100. Formula for Present Value (PV) = -----------
(1+i) n