09-13-2022 SA_2 16 Grosvenor Street London LH YSOM 895 Fall 2022

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Feb 20, 2024

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Yale School of Management Mgmt 895: International Real Estate Kevin D Gray, FRICS kevin.gray@kevindgray.com 917-597-1278 Skills Assessment #2: 16 Grosvenor Street, London, Leasehold Interest 16 Grosvenor Street is an office building located in the most prestigious part of London: Mayfair. The interest being analyzed is a leasehold interest, as Grosvenor Properties (Hugh Grosvenor, Seventh Duke of Westminster, born 1991, duke 2016) has owned the underlying ground since the 17 th century. This historic building has 15,682 sq. ft. of rentable area including a below ground level. This property is currently occupied by Quintain Services, the tenant of the leaseholder, and pays a net rent of GBP 830,000 per annum. The leasehold interest in the ground is held by SR Advisors, which must pay an annual rent to Grosvenor of 10% of any rent it receives from its tenant. Assume that Quintain Services Limited vacates the premises at the date of sale of the leasehold interest. Further assume that the building can be leased for a sum of GBP 1MM plus reimbursement of all operating expenses (except ground rent) to a replacement sub-tenant. Answer the following: 1. List all Fee Simple Interests: a. Grosvenor Properties (ground landlord) 2. List all Leased Fee Interests: a. SR Advisors (leasehold interest holder) 3. List all Leasehold Interests, indicate primary and sub-leasehold positions: a. Primary Leasehold Interest - SR Advisors b. Sub-Leasehold Interest - Quintain Services (current tenant) 4. Which ownership position is the most secure? Which is the least secure? a. Most i. Grosvenor Properties’ Fee Simple Interest b. Least i. Quintain Services’ Sub-leasehold interest 5. What is the assumed new rent per sq. ft. for the office space? a. New rent is £1,000,000/year (£63.77 per sq ft (£1,000,000 / 15,682 sq ft) 6. What is the return to the investor (grantee or buyer), pre-debt and pre-tax, at a purchase price of GBP 30 MM?

a. Return = Rent / Purchase Price = £1,000,000 / £30,000,000 = 3.33% 7. If Quintain Services requires a payment of GBP 415,000 for early surrender of lease, what is the return to the investor (grantee or buyer)? a. Return = Rent - Surrender Payment / Purchase Price = (£1,000,000 - £415,000) / £30,000,000 = 2.95% 8. Grosvenor receives 10% of any sub-leasehold rent as ground rent. What is the increase in revenue, also pre-tax, to Grosvenor in this transaction? If the Grosvenor cost of capital is 3.5% per annum, what is the incremental value of this transaction to Grosvenor? a. Increase in revenue = £100,000 - £83,000 = £17,000 At a 3.5% cost of capital: Incremental value = Increase in revenue / Cost of capital = £17,000 / 0.035 = £485,714

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