Pricing Upward-Only Adjusting Leases

26 Pages Posted: 18 May 2000 Last revised: 1 May 2022

See all articles by Brent W. Ambrose

Brent W. Ambrose

Pennsylvania State University - Department of Insurance & Real Estate

Patric H. Hendershott

University of Aberdeen - Centre for Property Research; National Bureau of Economic Research (NBER)

Malgorzata M. Klosek

National Institutes of Health (NIH)

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Date Written: March 2000

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.

Suggested Citation

Ambrose, Brent W. and Hendershott, Patric H. and Klosek, Malgorzata M., Pricing Upward-Only Adjusting Leases (March 2000). NBER Working Paper No. w7622, Available at SSRN: https://ssrn.com/abstract=228100

Brent W. Ambrose

Pennsylvania State University - Department of Insurance & Real Estate ( email )

Smeal College of Business,
Penn State University
University Park, PA US-0-PA 16802
United States
8148670066 (Phone)

HOME PAGE: http://https://sites.psu.edu/brentwambrose/

Patric H. Hendershott (Contact Author)

University of Aberdeen - Centre for Property Research ( email )

Aberdeen AB24 2UF
Scotland

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Malgorzata M. Klosek

National Institutes of Health (NIH) ( email )

9000 Rockville Pike
Bethesda, MD 20892
United States

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