Year Published
1999
Abstract
Since the option to redevelop a property is valuable, ground leased property should trade at a
discount relative to fee simple property because of the impairment of the value of that option
resulting from the foreshortened horizon of the leaseholder. This discount would be over and
above the discount that results from the leaseholder’s non-existent residual claim to the property.
We evaluate alternative contractual arrangements that may be more incentive compatible between
the owner of the leased fee and the leasehold. We find that a lease extension clause causes the
lessee to defer development and develop at much higher density. Sharing of the value of the
residual claim between the owner of the leased fee and the leasehold also increases the intensity
of redevelopment but results in earlier redevelopment. Also, we find that a more realistic
escalation clause causes redevelopment to occur sooner but at similar density.
discount relative to fee simple property because of the impairment of the value of that option
resulting from the foreshortened horizon of the leaseholder. This discount would be over and
above the discount that results from the leaseholder’s non-existent residual claim to the property.
We evaluate alternative contractual arrangements that may be more incentive compatible between
the owner of the leased fee and the leasehold. We find that a lease extension clause causes the
lessee to defer development and develop at much higher density. Sharing of the value of the
residual claim between the owner of the leased fee and the leasehold also increases the intensity
of redevelopment but results in earlier redevelopment. Also, we find that a more realistic
escalation clause causes redevelopment to occur sooner but at similar density.
Research Category