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Lease Terms, Option Pricing and the Financial Characteristics of Property

Published online by Cambridge University Press:  10 June 2011

A.T. Adams ,
P.M. Booth  and
B.D. MacGregor
A.T. Adams
Affiliation:
The Management School, University of Edinburgh, William Robertson Building, 50 George Square, Edinburgh EH8 9JY, U.K., Tel: +44(0)131-650-3807, Fax: +44(0)131-668-3053, Email:A.Adams@ed.ac.uk
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Abstract

Traditional and standard discounted cash flow valuation techniques are unable to deal with a variety of options contained in lease contracts. In the United Kingdom the most important embedded option is the upward-only rent review. This becomes more valuable to the landlord in an era of low demand and low inflation, as nominal market rents are more likely to fall. Lease contracts are freely negotiated between landlord and tenant, and alternative forms of rent review clause would fundamentally change the investment characteristics of property. Many other less common options also exist in lease contracts and these create further valuation difficulties. It is essential that property valuation techniques be developed that explicitly value the options in lease contracts.

Keywords

Property ValuationLease TermsUpward-Only Rent ReviewsOptions
Type
Sessional meetings: papers and abstracts of discussions
Information
British Actuarial Journal , Volume 9 , Issue 3 , 01 August 2003 , pp. 619 - 635
Copyright
Copyright © Institute and Faculty of Actuaries 2003

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