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Ground rental rates and ratchet clauses

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  • Martin Lally
  • John Randal

Abstract

The present paper investigates the effect of a ratchet clause on the appropriate rental rate for a ground lease, in the circumstance where land value is periodically reassessed. The effect of the ratchet clause depends primarily upon the life of the lease and the volatility in land returns. For a lease with a 20‐year life, and land value reviewed every 5 years, the effect of the ratchet clause is to lower the appropriate rental rate by around one percentage point. Partial ratchet clauses are also examined, and are shown to have an effect equal to approximately 80 per cent that of a full ratchet clause.

Suggested Citation

  • Martin Lally & John Randal, 2004. "Ground rental rates and ratchet clauses," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 44(2), pages 187-202, July.
    • Handle: RePEc:bla:acctfi:v:44:y:2004:i:2:p:187-202
    DOI: 10.1111/j.1467-629X.2004.00106.x
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    References listed on IDEAS

    as
    1. Grenadier, Steven R., 1995. "Valuing lease contracts A real-options approach," Journal of Financial Economics, Elsevier, vol. 38(3), pages 297-331, July.
    2. McConnell, John J. & Schallheim, James S., 1983. "Valuation of asset leasing contracts," Journal of Financial Economics, Elsevier, vol. 12(2), pages 237-261, August.
    3. Lally, Martin & Marsden, Alastair, 2004. "Tax-adjusted market risk premiums in New Zealand: 1931-2002," Pacific-Basin Finance Journal, Elsevier, vol. 12(3), pages 291-310, June.
    4. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
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    Cited by:

    1. Quigley, Neil & Boyle, Glenn & Guthrie, Graeme, 2008. "Estimating Implied Valuation Parameters: Extension and Application to Ground Lease Rentals," Working Paper Series 4012, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    2. Quigley, Neil & Boyle, Glenn & Guthrie, Graeme, 2008. "Estimating Implied Valuation Parameters: Extension and Application to Ground Lease Rentals," Working Paper Series 19113, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    3. Maria Trojanek & Marcin Anholcer & Audrius Banaitis & Radoslaw Trojanek, 2018. "A Generalised Model of Ground Lease Pricing," Sustainability, MDPI, vol. 10(9), pages 1-21, September.
    4. repec:vuw:vuwscr:19113 is not listed on IDEAS
    5. Glenn Boyle & Graeme Guthrie & Neil Quigley, 2009. "Estimating unobservable valuation parameters for illiquid assets," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 49(3), pages 465-479, September.

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