In order to understand the proper valuation of intrests in the leasehold land we must first understand different type of leases and lease hold intrest.
Lessees Interest
The lessees interest in an investment property is the present value of the profit rental. Therefore there is no lessee interest if there in no profit rental. The lessees interest is used in this context is an economic interest as the lessee paying market rent still has legal interest in the property.
Lessor`s interest
The lessors interest in an investment property is the unencumbered market value less the lessees interest
Reversionary interest
- The period of the lease
- The unencumbered value of the property at end of the lease
The unencumbered due at the end of the lease term is known as revisionary interest because the vacant property reverts to the owner at end of lease term.
Lease period Reversionary period
================= 10 years=========> perpetuity
YEARS---------------------------------------------->