18. Depreciation of a Lease-Hold

Suppose the syndicate acquires a 50 year lease-hold. This means that the syndicate does not acquire owner­ship of the land and building but leases it for 50 years with the right to sublet or make its own leases with the tenants during that period. The source of the income and profit of the syndicate will be the difference between the rent which the syndicate will have to pay to the owner and the rent which the syndicate collects from sub­tenants. It is not difficult to see that after the expiration of 50 years the syndicate will not have any property left from which it could derive any profits. Its own lease will have expired. Consequently at the end of 50 years the syndicate will not be in a position to sub-let to other ten­ants. Its sole source of profits has ceased to exist. If this hypothetical syndicate claims every year 2% depreciation based on the cost of its lease-hold, it will hit it exactly on the nose. At the end of 50 years it will have claimed 100% depreciation (50 times 2%), and it will have noth­ing left.

If during these 50 years the syndicate paid you 12% on your investment each year, 2% was really a return of the money which you invested and only 10% was income, less income taxes of course. If the distribution amounted to 10%, the same 2% was a return of capital and only 8% was income, again less your income taxes. The depre­ciation allowance claimed corresponded exactly to the actual yearly diminution in value. To restate this once more in plain language: part of the money which was distributed to you every year was a repayment of the money which you invested. It was not profit.

When a leasehold is syndicated, you should clearly consider a part of each payment to you as a return of cap­ital, because the life of the lease is running out, slowly but surely.

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