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Pricing Upward-Only Adjusting Leases

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  • Ambrose, Brent W
  • Hendershott, Patric H
  • Klosek, Malgorzata

Abstract

This paper presents a stochastic pricing model of a unique, path-dependent lease instrument common in the United Kingdom and numerous commonwealth countries, the upward-only adjusting lease. In this lease, the rental rate is fixed at lease commencement but will be reset to the market rate at predetermined intervals (usually every five years) if it exceeds the contract rent. We derive a closed form expression for the market rent of a lease with upward-only adjustments. Results indicate what the initial coupon rate on a 10-year lease with one reset should be relative to that on a symmetric up-and-downward adjusting "variable rate" lease under various economic conditions (level of real interest rates and expected drift and volatility of the underlying rental service flow). We also consider the calculation of effective rents when free rent periods are given. Copyright 2002 by Kluwer Academic Publishers

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Bibliographic Info

Article provided by Springer in its journal Journal of Real Estate Finance & Economics.

Volume (Year): 25 (2002)
Issue (Month): 1 (July)
Pages: 33-49

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Handle: RePEc:kap:jrefec:v:25:y:2002:i:1:p:33-49

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Web page: http://www.springerlink.com/link.asp?id=102945

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References

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  1. McConnell, John J. & Schallheim, James S., 1983. "Valuation of asset leasing contracts," Journal of Financial Economics, Elsevier, vol. 12(2), pages 237-261, August.
  2. Grenadier, Steven R., 1995. "Valuing lease contracts A real-options approach," Journal of Financial Economics, Elsevier, vol. 38(3), pages 297-331, July.
  3. Grenadier, Steven R., 1996. "Leasing and credit risk," Journal of Financial Economics, Elsevier, vol. 42(3), pages 333-364, November.
  4. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
  5. Patric H. Hendershott & Colin M. Lizieri & George A. Matysiak, 1999. "The Workings of the London Office Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 27(2), pages 365-387.
  6. Miller, Merton H & Upton, Charles W, 1976. "Leasing, Buying, and the Cost of Capital Services," Journal of Finance, American Finance Association, vol. 31(3), pages 761-86, June.
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Cited by:
  1. Richard Stanton & Nancy Wallace, 2009. "An Empirical Test of a Contingent Claims Lease Valuation Model," Journal of Real Estate Research, American Real Estate Society, vol. 31(1), pages 1-26.
  2. Fang Fang & Lu Ruichang, 2009. "Is There a Term Structure? Empirical Evidence from Shanghai Office Rental Market," International Real Estate Review, Asian Real Estate Society, vol. 12(1), pages 23-38.
  3. Brent Ambrose & Yildiray Yildirim, 2008. "Credit Risk and the Term Structure of Lease Rates: A Reduced Form Approach," The Journal of Real Estate Finance and Economics, Springer, vol. 37(3), pages 281-298, October.
  4. Steven R. Grenadier, 2003. "An Equilibrium Analysis of Real Estate," NBER Working Papers 9475, National Bureau of Economic Research, Inc.
  5. Fuerst, Franz & McAllister, Patrick, 2008. "Green Noise or Green Value? Measuring the Price Effects of Environmental Certification in Commercial Buildings," MPRA Paper 11446, University Library of Munich, Germany, revised Sep 2008.
  6. Shaun Bond & Pavlos Loizou & Patrick McAllister, 2008. "Lease Maturity and Initial Rent: Is There a Term Structure for UK Commercial Property Leases?," The Journal of Real Estate Finance and Economics, Springer, vol. 36(4), pages 451-469, May.

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