Developing a ground rental 'indifference' valuation model

Abstract

Ground rentals are commonly valued by applying a 'ground rental rate' as a percentage per annum to an assessed vacant land value. This paper presents a ground rental valuation model to determine the appropriate 'ground rental rate' based on equating the long-term costs of building on leasehold land versus freehold land. The model solves for a ground rental that produces equivalent net present values at differential freeholder's and lessee's required investment returns. These returns reflect the different risks and returns in ground leasing compared to outlaying capital to buy land for erecting a building as an investment property.