When you purchase a dwelling located on a piece of leasehold land, you do not own the underlying land,
but you do have a saleable interest  which is worth more than the buildings alone. Nevertheless this
saleable interest is always worth something less than the freehold (fee-simple) interest.

These additional interests stem from two distinct sources:

  1. The savings (if any) accruing from any differences between the ground rent and the notional
    (mortgage) interest amount  which you would have to pay if you borrowed money to purchase land
    of the same value.
  2. Interest accruing from a perpetual right of renewal, sometimes expressed as a percentage of the
    land value.

Example:

Land currently valued at $100,000 with a perpetual right of renewal. Rent is reviewed every 14 years and is
set at 8% of the land value at the time. Rent was last reviewed and set four years ago when the land was
worth $80,000. Current rental is $6,400 per annum. Current interest rate is 10%.
.
Calculation of Lessees Interest in Land
Free Calculators
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Step 1
 Notional Bank interest if purchasing land
worth $100,000 @ 10% (a)
 = $10,000 pa
  
  Less current annual ground rental  (b)
 =  $  6,400 pa
  
  Annual benefit to lessee until next rent
review (a) minus (b)
    
Step 2
 Present Value of Annual benefit until next
review in ten years (i.e. PV of $3,600 at
10% for 10 years)
   $24,156
Step 3
 Allowance for perpetual right of renewal,
say 10% of Land Value
   $10,000
Step 4
 Lessees Interest in the Land Component
 Add Step 1 + Step 2
 $34,156
Warning: Remember that mathematical calculations such as this are only as good as they reflect buyers
and sellers behaviour in the market place. The best evidence is always completed sales of similar
properties.

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