TYPICAL SOLVED CASE STUDY
ON LICENCE AGREEMENT FOR LAND N BUILDINGS ASSET CLASS
FOR EXAMINATION PURPOSES
SHARED FOR KNOWLEDGE GAIN PURPOSES ONLY
A residential apartment building in a high-class locality was licensed in Aug. 2015 for 3 years. The area of the apartment is 2500 sq. ft. and license compensation was fixed @ Rs. 2,00,000/- per month and deposit paid as Rs. 25 Lakh.
Society maintenance charges Rs. 15,000/- per month to be paid by the licensor.
Workout the sale value of the apartment building in Aug. 2016, if the prevailing market rate in the locality is Rs. 25,000/- sq. ft.
Assume 8% capitalization rate and yield @ 4% for the licensed property.
MCQ’s
i. Since the rent act is not applicable in this case, because it is a
a. lease rented property b. license rented property
c. ordinary rented property d. none of the above
ii. What is the yield rate adopted to assess the capitalized value of rental income in this case?
a. 4% b.6% c. 8% d. 12%
iii. Why the yield rate for rental income is adopted as low as 4% in this case, since it is a …………..
a. lease rented property b. license rented property
c. ordinary rented property d. none of the above
iv. What is the capitalized value from the net yield of the apartment in this case?
a. 22,20,000 b. 41,89,140 c. 5,35,81,250 d. 5,77,70,000
v. What is the reversionary value of the apartment in this case?
a. 22,20,000 b. 41,89,140 c. 5,35,81,250 d. 5,77,70,000
vi. What is the sale value of the apartment in 2016?
a. 22,20,000 b. 41,89,140 c. 5,35,81,250 d. 5,77,70,000
Sol.: Given: License Period= 3 Year
License fee= Rs.2, 00,000/ Month
Deposit Paid = Rs.25,00,000/
Society maintenance Charges to be paid by licensor = Rs.15, 000/ Month
Prevailing market rate in the area= Rs.25,000/ sq. ft.
Capitalization Rate = 8%
Yield rate=4%
i. Since the rent act is not applicable in this case, because it is a
a. lease rented property b. license rented property
c. ordinary rented property d. none of the above
The answer is (b)
ii. What is the yield rate adopted to assess the capitalized value of rental income in this case?
a. 4% b.6% c. 8% d. 12%
The answer is (a)
iii. Why the yield rate for rental income is adopted as low as 4% in this case, since it is a ———–
a. lease rented property b. license rented property
c. ordinary rented property d. none of the above
The answer is (b)
iv. What is the capitalized value from the net yield of the apartment in this case?
a. 22,20,000 b. 41,89,140 c. 5,35,81,250 d. 5,77,70,000
Sol.: The rent act is not applicable for licensed property, since the premises will revert back to the licensor (owner). This is more beneficial to the licensor as if it is a freehold property.
The prospective buyer has two benefits in 2016
(i) Income for further 2 years
(ii) Reversionary value of apartment after 2 years
i. Gross annual income, i.e. 2,00,000 12 = Rs. 24,00,000/-
Deduct Society maintenance charges 15000 12 = Rs. 1,80,000/-
Net annual income = Rs. 22,20,000/-
Capitalized value= Net Annual incomeY.P. =1 – ) Net Annual income = 1 – ) 2220000
=1.8872220000= Rs.4189140/(a)
Hence the answer is (b)
v. What is the reversionary value of the apartment in this case?
a. 22,20,000 b. 41,89,140 c. 5,35,81,250 d. 5,77,70,000
Value of apartment with vacant possession
i.e. 2500 25,000 = Rs. 6,25,00,000/-
Present value of Rs.1 receivable after 2 years assuming @ 8% yield
P.V. =0.8573
So, present value of property receivable after 2 years assuming @ 8% yield
i.e. 6,25,00,000 x 0.8573 = Rs. 5,35,81,250/- ……… (b)
Hence the answer is (c)
vi. What is the sale value of the apartment in 2016?
a. 22,20,000 b. 41,89,140 c. 5,35,81,250 d. 5,77,70,000
Total sale value of property (a+b)
i. e. 41,89,140/- + Rs. 5,35,81,250/-= Rs. 5,77,70,390/-
Say Rs. 5,77,70,000/-
Hence the answer is (d)
NOTE: Here the yield for rental income is @ 4% for licensed premises, but the reversion rate is adopted @ 8% as the capitalization rate since it is not an investment for revenue income, but the amount for getting back capital value. Hence it is selected as the remunerative rate for investment.