Year Published
2000
Abstract
Long-term land leaseholds are contracts that contain within them a redevelopment option. The
structure of the contract influences the incentive to redevelop. We employ real option pricing
techniques to evaluate the timing and intensity of the redevelopment decision by lessees in
alternative contracts. We consider a contract similar to ‘perpetual usufruct,’ the public long-term
land leasehold system in Poland as well as the typical North American long-term ground lease.
We also consider a lease in which extension is automatic if redevelopment occurs. Our research
suggests that the system of perpetual usufruct is superior to a system employing the typical North
American contract when the redevelopment outcomes of these alternatives are measured against
the first best outcome that results in a system with fee ownership. The research also suggests that
public land-leasehold systems will result, over time, in development densities that are lower than
would arise under fee ownership systems.
structure of the contract influences the incentive to redevelop. We employ real option pricing
techniques to evaluate the timing and intensity of the redevelopment decision by lessees in
alternative contracts. We consider a contract similar to ‘perpetual usufruct,’ the public long-term
land leasehold system in Poland as well as the typical North American long-term ground lease.
We also consider a lease in which extension is automatic if redevelopment occurs. Our research
suggests that the system of perpetual usufruct is superior to a system employing the typical North
American contract when the redevelopment outcomes of these alternatives are measured against
the first best outcome that results in a system with fee ownership. The research also suggests that
public land-leasehold systems will result, over time, in development densities that are lower than
would arise under fee ownership systems.
Research Category