Lecture 6

Marriage Value

BST22762
Real Estate Valuation
 Marriage Value

 A characteristic of land and property is that

there may exist at the same time freehold,
leasehold and sub-leasehold interests, all
having capital values.
 A value may be required to calculate the
value of each of these interests.

2
 Marriage Value

 Where a property is spilt into multiple

interests, either physically or legally, or both,
each of the newly created interests will have
a market value.
 The total of these values will not necessarily
equate with the market value of the freehold
in possession of the whole property.
 In such case, an element of what is known as
“Marriage Value” might be shown to exist.
3
 Marriage Value – an example
 Andy is the freeholder of an office building, the full rental value
of which is $2,800,000 p.a. on full repair and insurance (FRI)
terms. 14 years ago Andy let the whole building to Brian on a
40-year lease at a rent of $1,000,000 p.a. on FRI terms without
a rent review. Brian sub-let to Calvin 6 years ago, at a rent of
$1,800,000 p.a. for a term of 25 years without rent review.
Value all interests.
 Brian wishes to become the freeholder in possession of the
office building. Advise him on the sum to be offered for the
interests of Andy and Calvin. How much should they accept?
 Assume landlord’s interest @9%, sinking fund @3% and tax
@40%.

4
 Andy’s interest

 Valuation of current interests:

 (Freehold rate 10%)

 Andy’s interest:-
 Rent (from Brian) $1,000,000
 YP 26 years @9% 9.929
$9,929,000

5
 Andy’s interest

 Reversion to full rental value $2,800,000

 YP reversion to perpetuity 26 years @10%
0.839
 $2,349,200
 TOTAL
$12,278,200

6
 Brian’s interest

Brian’s interest:-

 Rent received (from Calvin as a sub-tenant)

$1,800,000
 Rent paid (to Brian as head-tenant) $1,000,000
 Profit rent $800,000

 YP 19 years @10% and 3% adjusted tax 40% 6.0112

$4,808,960

7
 Brian’s interest

 Reversion to rent received

 Full rental value $2,800,000
 Rent paid $1,000,000
 Profit rent $1,800,000
 YP 7 years @11% and 3% adjusted tax 40% 3.0533
 PV $1 in 19 years @ 11% 0.1377
 $756,791
 TOTAL $5,565,751

8
 Calvin’s interest

 Calvin’s interest
 Rent received $2,800,000
 Rent paid $1,800,000
 Profit rent $1,000,000

 YP 19 years @11% and 3% adjusted tax 40%

5.6703

 Estimated value $5,670,300

9
 Andy + Brian + Calvin’s interest

 The total value of all interests at present is:-

 $12,278,200 + $5,565,751 + $5,670,300
 = $23,514,251

10
 Purchase of freehold
 Brian wishes to become freeholder in possession. How
much will this be worth now that the full rental value can
be received immediately and in perpetuity.

 Full rental value (FRV) $2,800,000

 YP perpetuity @ 10% 10
 $28,000,000
 Notice that the total value of all interests at present is
only $23,514,251: there will be what is called a marriage
value created by merger of interests $4,485,749.

11
 How is this marriage created, and
where does it arise?

 Capital Value is the product of two things:

– income and
– a capitalization factor.
 It follows that the marriage value must arise
from one or both of these.

12
 Income

 Does this change upon merger of the

interests?
 In the case of the freehold in possession, the
total income passing is $2,800,000.
 When Andy, Brian and Calvin have interests
in the property Andy receives $1,000,000,
Brian makes a profit rent of $800,000 and C
makes a profit rent of $1,000,000.
13
 Income

 The total rents and profit rents passing is

therefore $2,800,000.
 This holds for any year.
 The total rents and profit rents will always be
full rental value (FRV), because what the
freeholder loses by way of rent, someone
else gains as profit rent.

14
 Capitalization factor

 Does this change?

 The freehold in possession is valued by applying a
single rate YP to the whole of $2,800,000.
 But when the interests are spilt, the profit rents
earned by Brian and Calvin are valued by dual rate
YPs, adjusted for tax.
 This leads to a lower capital value:
– YP for 10 years @10% 6.1446
– YP for 10 years @10% and 3% adjusted tax 40% 4.0752

15
 Income & Capitalization factor

 The effect of splitting the freehold in possession into

three interests has been to reduce the total value of
the building owing to the effect of valuing the
leasehold interests in dual rate.
 When leasehold and freehold interests are merged
to create a freehold in possession, the total value is
increased because the whole income is valued
single rate.
 This increase in value created by the merger is
known as marriage value.

16
 Marriage Value

Marriage Value $4,485,749

Calvin $5,670,300

Brian $5,565,751

Andy $12,278,200

Unencumbered $28,000,000
freehold
17
 Marriage Value

 The merger of interests will create additional value and

so Brian can offer $22,434,249 for the interests of
Andy and Calvin.
 Brian’s present interest is worth $5,565,751: the
freehold in possession will be worth $28,000,000 and
the gain $22,434,249 ($28,000,000 - $5,565,751)
 But how much should Brian offer to Andy and Calvin?
 What price should Andy and Calvin ask for their
interests?

18
 Brian’s offer

 Brian’s first move will be to buy either Andy’s

or Calvin’s interest.
 The maximum Brian will be able to offer Andy
is the gain to be made from the transaction.
 If Andy’s interest is purchased the freeholder
will only be subject to Calvin’s underlease.

19
 Brian’s offer

 Value of Brian + Andy

 Rent $1,800,000
 YP for 19 years @9% 8.9501
 $16,110,180

 Reversion to $2,800,000
 YP reversion perpetuity after 19 years @ 10% 1.635
 $4,578,000
 $20,688,180

20
 Brian’s offer

 Brian’s present interest is worth $5,565,751:

 the gain will be $20,688,180 - $5,565,751 =
$15,122,429 and this is the maximum that
can be offered to Andy.
 The minimum Andy will accept be the market
value of $12,278,200.

21
 Brian’s offer

 Assuming Andy and Brian will employ

valuers who will be aware of both figures
agreement will be reached between these
two boundaries.
 The difference between the figures is:
– $15,122,429 - $12,278,200 = $2,844,229;
 This is the marriage value between Andy and
Brian
22
 Brian’s offer - alternative

 Andy, before the transaction, had an interest

worth $12,278,200;
 Brian had an interest worth $5,565,751.
 This totals $17,843,951.
 The value of the combined interest is
$20,688,180; and
 the difference between these two figures is
$2,844,229, the marriage value.

23
 Brian’s offer - alternative
 Brian’s next step will be to acquire the interest of
Calvin.
 It must be noted that Brian now has an interest, as
freeholder, worth $20,688,180.
 By acquiring Calvin’s interest, Brian becomes the
freeholder in possession with an interest valued at
$28,000,000. the gain that Brian stands to make is
therefore:
– $28,000,000 - 20,688,180 = $7,311,820
 This is therefore the maximum that Brian could offer
to Calvin.

24
 Brian’s offer - alternative

 The minimum that Calvin will accept will be

the market value of $5,670,300.
 There will again be negotiation between the
two figures.
 The difference between these two figures is
$1,641,520 ($7,311,820 - $5,670,300), i.e,
the marriage value between Brian and
Calvin.
25
 Brian’s offer - alternative

 This may also be obtained by summating the

present interest of Brian and Calvin
($20,688,180 and $5,670,300 =
$26,358,480) and deducting this from Brian’s
new interest worth $28,000,000
– $28,000,000 - $26,358,480 = $1,641,520

26
 The Marriage Value
 Note that the total marriage value was found to be
 Marriage value Andy + Brian $2,844,229
 Marriage value Brian + Calvin $1,641,520
 Total marriage value $4,485,749

 This term Marriage Value usually refers to the above,

the result of the merging of interests in the same
property.
 It can also be used to describe the extra value
created by a merger of two properties.

27
 Marriage Value

 The marriage value is taken as the potential

for increase in the value of the flat arising
from the grant of the new lease and the Act
requires that this "profit" shall be shared
between the parties.
 The proportion of the split of Marriage Value
is fixed by the UK legislation at a 50:50
division between landlord and leaseholder.

28
 Marriage Value

 The compensation is to provide remedy to

the landlord for any other diminution in the
value of his interest in other property (other
flats in the building or the building itself) and
any loss or damage arising from the grant of
the new lease.
 It is difficult to find examples of where a
landlord could claim compensation since he
will, in most cases, retain the freehold.

29
 Marriage Value

 Probably the only possibilities could be a

claim for loss of opportunity for
redevelopment potential or for a
reconversion of a house in flats back to a
single dwelling house.
 Marriage value can be formed when two or
more interests merge together and the
marriage value are greater than the sum of
the values of the individual interests.

30
 Marriage Value – further examples

31
 Example 2
 The tenant rent a property for $80,000 p.a. with 3
years unexpired. If the full market rental value of the
property is $100,000 p.a., value the leasehold
interest, freehold interest subject to existing tenancy,
freehold interest with vacant possession, and
marriage value, and calculate the reasonable
amount payable by the landlord for the immediate
surrender of the existing lease.
 Assume a 11% yield, 3% A.S.F. & 40% of tax for the
tenant; 9% yield for the landlord; and 10% for the
redevelopment value.

32
 Leasehold Interest:

Full Market Rent $100,000

Less Rent Paid $80,000
Profit Rent $20,000
YP 3 yrs @11% & 3%, tax 40% 1.5403
Capital Value $30,806

33
 Freehold Interest Subject to
Existing Tenancy

Term
Existing Rent $80,000
YP 3 yrs @ 9% 2.5313
$202,504
Reversion
Full Rental Value $100,000
YP Prep def 3 yrs @ 10% 7.5131
$751,310

Capital Value $953,814

34
 Freehold Interest with Vacant Possession

Full Rental Value $100,000

YP Prep @ 10% 10
Capital Value $1,000,000

35
 Marriage Value

Marriage Value
= Freehold interest (Vacant) – [Freehold Interest (with lease) +
Leasehold Interest]
= $1,000,000 – [$953,814 + $30,806]
= $15,380
 The amount which the landlord pays to the tenant may be the
value of the lease hold interest plus half of the marriage value
 i.e. $30,806 + ($15,380/2) = $38,496

36
 Marriage Value

Gain of the landlord after merging

= [Freehold interest (Vacant) – Freehold Interest (with lease)] –
Amount Paid
= [$1,000,000 - $953,814] - $38,496
= $7,690
 Gain of the landlord after merging is equal to half of the
marriage value.
Note: the marriage value, instead of being shared equally between
the landlord and tenant, can be shared proportional to the
respective values of interests held by the landlord and tenant.

37
 Example 3

 The tenant rent a property for $80,000 p.a. with 3 years

unexpired. The full market rental value of the property is
$100,000 p.a.. If the landlord sell his property for
redevelopment, the redevelopment value of the property is
$5,000,000. Value the leasehold interest, freehold interest
subject to existing tenancy, freehold interest with vacant
possession, and marriage value, and calculate the reasonable
amount payable by the landlord for the immediate surrender of
the existing lease.
 Assume a 11% yield, 3% A.S.F. & 40% of tax for the tenant;
9% yield for the landlord; and 10% for the redevelopment
value.

38
 Example 3 - Leasehold Interest

Full Market Rent $100,000

Less Rent Paid $80,000
Profit Rent $20,000
YP 3 yrs @11% & 3%, tax 40% 1.5403
Capital Value $30,806

39
 Example 3 - Freehold Interest Subject to
Existing Tenancy

Term
Existing Rent $80,000
YP 3 yrs @ 9% 2.5313
$202,504
Reversion
Redevelopment Value $5,000,000
PV 3 yrs @ 10% 0.7513
$3,756,500

Capital Value $3,959,004

40
 Example 3 - Freehold Interest with
Vacant Possession

 Redevelopment Value $5,000,000

 Capital Value $5,000,000

41
 Example 3 - Marriage Value

Marriage Value
= Freehold interest (Vacant) – [Freehold Interest (with lease) +
Leasehold Interest]
= $5,000,000 – [$3,959,004 + $30,806]
= $1,010,190

 The amount which the landlord pays to the tenant may be the value
of the lease hold interest plus half of the marriage value
i.e. $30,806 + ($1,010,190/2) = $535,901

42
 Example 3 - Marriage Value

Gain of the landlord after merging

= [Freehold interest (Vacant) – Freehold Interest (with lease)]
– Amount Paid
= [$5,000,000 - $3,959,004] - $535,901
= $505,095
 Gain of the landlord after merging is equal to half of the
marriage value.

43
 Note

• In actual practice, the portion of marriage

value shared by the tenant will be much
smaller than this amount as his leasehold
interest is very small as compared with the
freehold interest.
• Any amount falling between $100,000 to
$200,000 may be considered reasonable,
although it all depends on negotiation.

44
 - The End -

45