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Long-term Public Leaseholds in Poland: Implications of Contractual Incentives

David Dale-Johnson and W. Jan Brzeski
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.