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Pricing Upward-Only Adjusting Leases

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Author Info
Brent W. Ambrose
Patric H. Hendershott
Malgorzata M. Klosek

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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. Numerical results indicate how the initial coupon rate should be set 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 during either a market collapse or a steady-state drift.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7622.

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Date of creation: Mar 2000
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Handle: RePEc:nbr:nberwo:7622

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Find related papers by JEL classification:
R0 - Urban, Rural, and Regional Economics - - General
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Grenadier, Steven R., 1995. "Valuing lease contracts A real-options approach," Journal of Financial Economics, Elsevier, vol. 38(3), pages 297-331, July. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
  3. McConnell, John J. & Schallheim, James S., 1983. "Valuation of asset leasing contracts," Journal of Financial Economics, Elsevier, vol. 12(2), pages 237-261, August. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
  5. 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. [Downloadable!] (restricted)
  6. Grenadier, Steven R., 1996. "Leasing and credit risk," Journal of Financial Economics, Elsevier, vol. 42(3), pages 333-364, November. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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. [Downloadable!]
    Other versions:
  2. 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. [Downloadable!] (restricted)
  3. Shaun A. Bond & Pavlos Loizou & Pat McAllister, 2005. "Lease Maturity and Initial Rent: Is There a Term Structure for UK Commercial Property Leases?," Real Estate & Planning Working Papers rep-wp2005-28, Henley Business School, Reading University. [Downloadable!]
  4. Steven R. Grenadier, 2003. "An Equilibrium Analysis of Real Estate," NBER Working Papers 9475, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. 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. [Downloadable!] (restricted)
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