CO129-617-4 New American Consulate building- lease for site 19-4-1949 - 11-7-1949 — Page 19

CONFIDENTIAL

ENCLOSURE 2

18

Hon. C.S..

The cost of conversion to freehold would be compounded from two elements; premium and Crown Rent.

PREMIUM: This was fixed at $30.00 per sq.ft. for a lease of 75 years renewable for a further term of 75 years at a Crown Rent to be fixed by mutual agreement. It was offered and accepted (Total:$1,410,000)

Assuming interest at 4% p.a. the. "years purchase" figure

equivalent to 150 years is 24.930. The figure for perpetuity is 25.000.

$30 x 25

24.930

Therefore the rate of premium for perpetuity would be per sq.ft.

$30.084.

=

47,000 sq.ft. @ $30.084 per sq. ft.

$1,413,948.

The difference is almost negligible and in practice a lease of more than 100 years is usually treated as a perpetual lease for the purpose of assessing value.

It should not be overlooked, however, that there is a very great difference between a perpetual lease (say 999 years) and a holding in fee simple and although a freeholder is subject to the laws of the realm he is not bound by any conditions usually to be found in a lease contract.

By article 7(2) of the draft convention enclosed in Secretary of State's Circular Despatch No.95213/50/48 of 11th November, 1948, local regulations regarding building and town planning would be enforceable in the present case, but it is doubtful whether they would be enforceable to the degree of re-entry for breaches thereof even in the case of a leasehold, and in the case of a freehold re-entry would be impossible under any circumstances. It is doubtful if there could be any effective safeguard against assignment without Government's permission first being obtained, in which case we might find some members of the public acquiring freehold property by purchase from the U.S.A.

Owing to these and other differences, not mentioned, between leasehold and freehold property, I consider that the premium for a freehold interest in Hong Kong should be calculated on a different basis from that of a leasehold interest however long the term.

I suggest a premium of $50 per sq.ft.

47,000 sq.ft. @ $50 per sq.ft.

= $2,350,000.

This sum would be payable at whatever time the lease was converted, but before the freehold could be granted, the lease would have to be surrendered and the value of the unexpired portion be deducted.

For example, if the lease were surrendered after 50 years the balance to be paid is calculated as follows:-

=

Value of freehold minus value of 100 years unexpired portion of lease.

YP at 4% for 100 years YP at 4% for perpetuity.

= $958,918.

$2,350,000 - 47,000 x $30 x

= $2,350,000 - 1,410,000 x

24.505 25

The premium for conversion at intervals of 10 years after

the commencement of the lease is as follows:-

N.B.

Not inclusive of Crown Rent.

TABLE I

After 10 years

$ 945,815

20

· 11

948,608