Lessor and lessee perspectives on ground lease pricing

Abstract

This paper is concerned with how to calculate fair ground rents in perpetual ground lease arrangements and under what circumstances ground leases are motivated. These problems have been debated for some time. In general, two different kinds of models have emerged in real estate economic literature. Both are reviewed in the paper. One difference between them is the interpretation of the term 'fair'. In this paper, a view of 'fair' ground rents stemming from the Pareto criterion is introduced. It is argued that, under this view, both kinds of models must be used simultaneously. Hence, the two models are modified and combined into a so-called combined model. Using this, it is argued that risk-sharing and asymmetric information about future value growth are two important motivations for ground leases. The latter is of certain interest, since it can result in an adverse selection problem followed by a thin market.