FAQ Valuation of leasehold rights

What are leasehold rights?

The leasehold interest (DAB ) is the sum paid by a buyer to take over a commercial lease on advantageous terms (below-market rent, secure term, renewal rights, prime location, etc.). It is an intangible asset recorded on the balance sheet as a fixed asset.

It's not a "pas-de-porte" (entrance fee paid to the owner at the start of the lease). The DAB is paid to the assignor, although sometimes, surprisingly, it is also claimed by a landlord - but then it's more like an entry fee!

In common parlance - and sometimes even in practice - the droit au bail is wrongly confused with the "pas-de-porte" or other forms of entry fee demanded by certain lessors. However, legally speaking, leasehold rights are an intangible asset transferred by the outgoing tenant, never by the owner. It corresponds to the economic advantage for the transferee of benefiting from a lease on favorable terms.

On the other hand, a "key money" fee, paid to the lessor when a new lease is signed, is governed by case law: it cannot disguise a disguised rent or be unreasonably high. Some landlords circumvent this framework by demanding "entry fees", "processing fees", or other dubious designations when renewing or re-letting. These practices may be questionable, or even illegal, if they have no clear economic counterpart.

Distinguishing legitimate leasehold rights from abusive entry fees is therefore essential, both to secure a transaction and to build a legally sound valuation. In this respect, a rigorous legal analysis of the lease is essential.

Why value leasehold rights?

Its value reflects the savings made or the advantage obtained by the buyer:

• below-market rent ;
• a secure lease in accordance with the rules governing commercial leases;
• This right values the location, the remaining term of the lease and the clauses (destination, subletting, charges, etc.), particularly in areas where locations are scarce.

In short, it enhances a commercial advantage secured by a commercial lease for the future operator.

Three main valuation methods

Not all methods are created equal, and some are better suited to a particular context. Here are some of the most commonly used.

1. Rent differential method ("rent saving")

• On valorise l’avantage économique direct pour l’occupant (loyer payé < loyer marché). On calcule la différence entre la valeur locative de marché (VLM) et le loyer real actuel (L), multiplié par la durée restante (n) et un coefficient de situation (c):

DAB ≈ (VLM − L) × n × c

• The commerciality coefficient ("c") is set by reference to case law:
  • 4-5 for standard locations,
  • 6-7 very good locations,
  • up to 8.5-9.3 for exceptional locations.

Example: lease at €35,000/year, market rent = €40,000/year, 7 years left => (5,000 × 7) × c ≈ value = 35,000 × c (typically 4-6) or €140,000-210,000.

2. Comparison method

This method consists of estimating the value of the leasehold rights by comparing similar recent transactions, in the same geographical area, for equivalent premises (surface area, location, type of activity, general condition of the premises, remaining lease term, etc.).

This is the method preferred by the courts when comparables are reliable, and is often used as a cross-check with the rent savings method.

Sources used

• Internal data (network of real estate agents, local appraisal firms)
• Specialized databases (e.g. PERVAL, DVF [Demande de Valeurs Foncières], INSEE business premises)
• Sales of similar businesses
• Case law (including decisions to revalue eviction compensation)

Benefits

• Practical, easy to explain to a buyer or judge
• Gives you a foothold in the reality of the local market
• Reliable and easy to read, this method is often preferred by those involved in the transaction, but it is only valid if a large number of consistent references are available.

3. Other "scientific" methods (location coefficient, DCF, etc.)

We value the commercial potential of the location, independently of the rent paid.

This method involves applying a location or marketability coefficient to a reference rent or surface area to obtain an estimate of the leasehold interest.

It is widely used by real estate appraisers, the courts and in professional scales (particularly in large cities). This coefficient is supposed to integrate :

• the zone's commercial appeal;
• passage intensity (pedestrian/vehicle flow) ;
• the scarcity of available premises ;
• environment (national banners, commercial mix, etc.)

The advantages:

• Multiple based on surface area, rent evolution and location via a coefficient taken from market jurisprudence.
• Enables rapid appraisals for land surveyors, cross-referenced with comparative approaches.
• Allows you to build up a reference range, especially when data is fragmentary.

Limits and exceptions

Leasehold rights are not always valuable. In some cases, it even becomes... theoretical.

1. When rent savings are nil or low
   If the current rent is close to or higher than the rental value, the method becomes unreliable. In this case, the only residual value is linked to the location, which makes the valuation complex.
2. Office premises
   Recent case law shows that in the case of office premises, judges generally accept that there is no loss, virtually nullifying any valuation of the ATM.
3. Durée restante du bail
   Un bail court réduit drastiquement la valeur du DAB : un bail restant < 3 ans peut diminuer la valeur de 50 % ou plus, surtout si les conditions de renouvellement sont incertaines.
4. Restrictive clauses

• Special-purpose leases or approval clauses
• Prohibition or limited authorization of repossession or subletting
  These clauses reduce the number of potential repossessors and therefore the value.

Key points to analyze

Before any valuation, an audit is required on several dimensions.

• Difference between actual rent and rental value: the starting point for any valuation.
• Remaining term of the lease, guarantees, planned revision, smoothing at +10% max/year imposed by the Commercial Code.
• Marketability coefficient: set according to the quality of the location, but beware of tooling/inconsistent practices.
• Contractual clauses: exclusivity ("all businesses"), subleasing, assignment, destination, guarantees (partners, lessor).
• Legal risks: de-capping, contentious reviews, possible eviction compensation.
• Local comparables: recent transactions, local market trends, CRCC/AGIRC data.

Why is a technical angle essential?

An approximate valuation can be very costly. An overvalued right to lease can scare off a buyer, or create a post-sale dispute. An undervalued DAB can cost the seller tens of thousands of euros. A poorly explained DAB can make for shaky negotiations.

A rigorous eye, combining an accounting, legal and commercial approach, is therefore essential. 2 common examples of leasehold valuation errors:

• Overestimation: a buyer may discover that the rent does not compensate much, that the lease expires soon, that the clauses are restrictive → valuation revised downwards by 30 to 50%.
• Under-estimation: in a buffer lease (very low rent, long lease, "all retail" destination), an inaccurate valuation can leave 20%+ of the value on the table.

To conclude on the valuation of leasehold rights

Leasehold rights are an asset in their own right, and can be used to enhance the value of a business. But it must be analyzed rigorously:

• Rent savings (differential × remaining term × coefficient)
• Consideration of restrictive clauses, location and case law
• Check with comparables before concluding.

A properly valued ATM can make the difference between a profitable acquisition or a heavy risk for the buyer. At XVAL, we combine quantitative rigor with legal and field analysis to guarantee a reliable and optimized valuation. Contact us for a complete appraisal: