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Debundling Property Rights for Contaminated Properties: Valuing the Opportunity Cost of the Right to Sell, Using Cumulative Options

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Author Info

  • Robert A. Simons

    (Ph.D, Levin College of Urban Affairs, Cleveland State University, Cleveland, Ohio 44122, R.simons@csuhio.edu, Tel: (216) 687 5259, Fax: (216) 687 9342.)

  • Ron Throupe

    (Ph.D., MRICS, Franklin L. Burns School of Real Estate & Const. Mgmt, Daniels College of Business, University of Denver, Denver CO 80208, rthroupe@du.edu, Tel: (303) 871-4738, Fax (303) 871-2971.)

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    Abstract

    This paper examines the loss of control of the ability to time the sale or develop property as an intrinsic benefit of the bundle of ownership rights. This right, proxied by the real option to control property, can be hindered by the existence of contamination. An empirical analysis of a contaminated site is used to illustrate the cumulative effect of this sell option and a measurement of financial loss. The results of a survey are used to determine the likely value of the real estate option and its effect on the subject property as part of the overall value. The results suggest a value for the sell (call) option which is dependent on the time before expiration. For the case study and ten year time period used in this research, 27% to 40% of the property value is estimated as the value of the loss in ability to sell.

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    Bibliographic Info

    Article provided by Asian Real Estate Society in its journal International Real Estate Review.

    Volume (Year): 15 (2012)
    Issue (Month): 2 ()
    Pages: 231-252

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    Handle: RePEc:ire:issued:v:15:n:02:2012:p:231-252

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    Postal: Asia Real Estate Society, 51 Monroe Street, Plaza E-6, Rockville, MD 20850, USA
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    Web page: http://www.asres.org/

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    Postal: Asian Real Estate Society, 51 Monroe Street, Plaza E-6, Rockville, MD 20850, USA
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    Web: http://www.asres.org/

    Related research

    Keywords: Bundle of Rights; Hazardous Materials; Option Pricing; Optimal Timing; Option to Sell; Trespass;

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    References

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    1. Thomas O. Jackson, 2001. "Environmental Risk Perceptions of Commercial and Industrial Real Estate Lenders," Journal of Real Estate Research, American Real Estate Society, vol. 22(3), pages 271-288.
    2. Capozza Dennis R. & Sick Gordon A., 1994. "The Risk Structure of Land Markets," Journal of Urban Economics, Elsevier, vol. 35(3), pages 297-319, May.
    3. Shilling, James D. & Sirmans, C. F. & Turnbull, Geoffrey K. & Benjamin, John D., 1990. "A theory and empirical test of land option pricing," Journal of Urban Economics, Elsevier, vol. 28(2), pages 178-186, September.
    4. Rose Neng Lai & Ko Wang & Yuqing Zhou, 2004. "Sale before Completion of Development: Pricing and Strategy," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(2), pages 329-357, 06.
    5. Quigg, Laura, 1993. " Empirical Testing of Real Option-Pricing Models," Journal of Finance, American Finance Association, vol. 48(2), pages 621-40, June.
    6. Williams, Joseph T, 1991. "Real Estate Development as an Option," The Journal of Real Estate Finance and Economics, Springer, vol. 4(2), pages 191-208, June.
    7. Schatzki, Todd, 2003. "Options, uncertainty and sunk costs:: an empirical analysis of land use change," Journal of Environmental Economics and Management, Elsevier, vol. 46(1), pages 86-105, July.
    8. Grenadier, Steven R, 1996. " The Strategic Exercise of Options: Development Cascades and Overbuilding in Real Estate Markets," Journal of Finance, American Finance Association, vol. 51(5), pages 1653-79, December.
    9. Ko Wang & Yuqing Zhou, 2006. "Equilibrium Real Options Exercise Strategies with Multiple Players: The Case of Real Estate Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 34(1), pages 1-49, 03.
    10. Robert A. Simons & Jesse Saginor, 2010. "Determining Off-Site Damages to Non-Residential Property from Leaking Underground Storage Tanks Using Contingent Valuation Analysis," International Real Estate Review, Asian Real Estate Society, vol. 13(2), pages 134-156.
    11. Titman, Sheridan, 1985. "Urban Land Prices under Uncertainty," American Economic Review, American Economic Association, vol. 75(3), pages 505-14, June.
    12. Clapp, John M. & Salavei, Katsiaryna, 2010. "Hedonic pricing with redevelopment options: A new approach to estimating depreciation effects," Journal of Urban Economics, Elsevier, vol. 67(3), pages 362-377, May.
    13. Nancy Bockstael, 2008. "An Empirical Examination of the Timing of Land Conversions in the Presence of Farmland Preservation Programs," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 90(3), pages 613-626.
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