So that's all fine - but here is the complexity. You go shopping and see a leasehold property for sale with 15 years of the initial lease still to run and with the option to extend another 20 years in the contract. Nearby you see a comparable property but it is freehold. Naturally the freehold property costs more but how do you juggle the comparisons.
With the freehold option, the owner will benefit from land price increases, and he/she owns the buildings and improvements - fairly straightforward.
With the leasehold option, you have a contract with the land owner for the agreed years, and the option to extend which you will pay for at the time, and you own the buildings with the obvious qualification that you usually cannot take them when the leasehold eventually expires.
So if you think a 90 year leasehold would be about the same price as freehold, you may figure the 15 years of lease of the land would be 1/6 of the freehold cost of a similar vacant lot. Then you add to that the value of the buildings with the proviso that towards the end of the lease you will lower the valuation of the buildings because they must be left behind. Then the option for extension is worth something to you because you can get more value from the buildings. So maybe you add that and keep in your mind what you think you will need to pay for the lease extension.
Well that's complex so what you probably really do is look at many leasehold offerings and try an get a feel for "market value".
With the freehold option, the owner will benefit from land price increases, and he/she owns the buildings and improvements - fairly straightforward.
With the leasehold option, you have a contract with the land owner for the agreed years, and the option to extend which you will pay for at the time, and you own the buildings with the obvious qualification that you usually cannot take them when the leasehold eventually expires.
So if you think a 90 year leasehold would be about the same price as freehold, you may figure the 15 years of lease of the land would be 1/6 of the freehold cost of a similar vacant lot. Then you add to that the value of the buildings with the proviso that towards the end of the lease you will lower the valuation of the buildings because they must be left behind. Then the option for extension is worth something to you because you can get more value from the buildings. So maybe you add that and keep in your mind what you think you will need to pay for the lease extension.
Well that's complex so what you probably really do is look at many leasehold offerings and try an get a feel for "market value".