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Valuing Long-Term Leases: The Option to Redevelop

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Author Info

  • Capozza, Dennis R
  • Sick, Gordon A

Abstract

Long-term leases on property are popular in many jurisdictions, both with private vendors and with local governments who want to retain future control over land use. A puzzling issue for vendors and purchasers has been how to value these leased properties relative to fee-simple properties. Simple present-value models suggest that there should be little difference between the price of fee-simple land and the price of long-term leases. Transaction prices in Canada on 80-year to 100-year residential leases, however, are 20 percent to 40 percent less than comparable fee-simple properties. The authors outline a financial model for valuing leased properties. The value of the option to upgrade or redevelop is considered. They show that the large part of the discount of leased properties from fee-simple properties can be explained by this option to redevelop. Copyright 1991 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): 4 (1991)
Issue (Month): 2 (June)
Pages: 209-23

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Handle: RePEc:kap:jrefec:v:4:y:1991:i:2:p:209-23

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

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Cited by:
  1. Spiegel, Matthew, 1999. "Housing Return and Construction Cycles," Research Program in Finance, Working Paper Series qt8647j8gq, Research Program in Finance, Institute for Business and Economic Research, UC Berkeley.
  2. Matthew Spiegel, 1999. "Housing Return And Construction Cycles," Yale School of Management Working Papers ysm114, Yale School of Management, revised 01 Mar 2001.
  3. Rabotyagov, Sergey S. & Lin, Sonja, 2013. "Small forest landowner preferences for working forest conservation contract attributes: A case of Washington State, USA," Journal of Forest Economics, Elsevier, vol. 19(3), pages 307-330.
  4. Capozza, Dennis R. & Li, Yuming, 2002. "Optimal Land Development Decisions," Journal of Urban Economics, Elsevier, vol. 51(1), pages 123-142, January.
  5. Matthew Clayton & David Yermack, 1999. "Major League Baseball Player Contracts: An Investigation of the Empirical Properties of Real Options," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-051, New York University, Leonard N. Stern School of Business-.
  6. Bun Lee & Eui-Chul Chung & Yong Kim, 2004. "Dwelling Age, Redevelopment, and Housing Prices: The Case of Apartment Complexes in Seoul," The Journal of Real Estate Finance and Economics, Springer, vol. 30(1), pages 55-80, October.
  7. Nordvik, Viggo, 2000. "Tenure flexibility and the supply of private rental housing," Regional Science and Urban Economics, Elsevier, vol. 30(1), pages 59-76, January.
  8. YongQiang Chu & Tien Sing, 2007. "Optimal Timing of Real Estate Investment under an Asymmetric Duopoly," The Journal of Real Estate Finance and Economics, Springer, vol. 34(3), pages 327-345, April.
  9. Andrianos Tsekrekos & George Kanoutos, 2013. "Real Options Premia Implied from Recent Transactions in the Greek Real Estate Market," The Journal of Real Estate Finance and Economics, Springer, vol. 47(1), pages 152-168, July.
  10. Abdullah Yavas & C. Sirmans, 2005. "Real Options: Experimental Evidence," The Journal of Real Estate Finance and Economics, Springer, vol. 31(1), pages 27-52, August.
  11. Lander, Diane M. & Pinches, George E., 1998. "Challenges to the Practical Implementation of Modeling and Valuing Real Options," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(3, Part 2), pages 537-567.
  12. Steven R. Grenadier, 2003. "An Equilibrium Analysis of Real Estate," NBER Working Papers 9475, National Bureau of Economic Research, Inc.
  13. Patric H. Hendershott, 1997. "Uses of equilibrium models in real estate research," Journal of Property Research, Taylor & Francis Journals, vol. 14(1), pages 1-13, January.
  14. Jason Winfree & Jill McCluskey & Ron Mittelhammer, 2006. "Buyer-Type Effects in Conservation and Preservation Property Values," The Journal of Real Estate Finance and Economics, Springer, vol. 33(2), pages 167-179, September.
  15. Riddiough, Timothy J., 1997. "Debt and Development," Journal of Urban Economics, Elsevier, vol. 42(3), pages 313-338, November.
  16. Brent Ambrose, 2005. "Forced Development and Urban Land Prices," The Journal of Real Estate Finance and Economics, Springer, vol. 30(3), pages 245-265, April.

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