Ground Lease Research Articles

Urban ground leases: a cross-country comparison

ABSTRACT The ground lease is a form of land tenure where the property rights are split between the lessor (landowner) and the lessee (land user). Additional ground lease features, such as the obligation to pay ground rent, depend on factors including the legal framework and lessor requirements. Ground lease features can lead to interpretation problems for ground leaseholders and even valuers, such as misunderstanding the extent of ground rent review. This paper examines location-based differences in order to highlight ground lease variability across countries. The term ‘ground lease’ is effectively a catch-all term for a tenure type that can display considerable differences depending on the location. Recognition of potential ground lease pitfalls and how ground leases differ across jurisdictions is necessary in an increasingly connected world. This paper advocates for uniform international ground lease terminology that more completely explains the extent of tenure rights of each ground lease.

The response to freehold growth information when estimating ground leasehold value

PurposeThis paper is concerned with behavioural responses to reviewed ground rents in New Zealand. The focus is on how freehold growth information is interpreted when considering reviewed ground rents on ground leasehold value.Design/methodology/approachSemi-structured interviews were conducted with ground leaseholders to inform the design of a controlled experiment. The interviews revealed that (a) purchasers tended to directly compare freeholds to ground leaseholds and (b) used rudimentary valuation methods. In the experiment, 40 property investors were requested to estimate the ground leasehold value close to the ground rent review time. Thereafter, 20 of the investors reassessed their ground leasehold value estimate using a projection of the future ground rent and a statement as to freehold growth (treatment). The control group of the remaining 20 investors received the estimate of the future ground rent only.FindingsThe tendency for higher treatment group valuations indicated the growth information was too available. Comparing ground leaseholds directly to freeholds, rather than thinking about the cost implications, is attributed to a manifestation of the availability heuristic.Research limitations/implicationsThe study involves a typical ground lease arrangement (as verified by experts) in the New Zealand market where there are few protections for ground leaseholders. These findings justify prohibiting new ground leases where the ground rents are set by reference to freehold land value.Originality/valueThis paper extends behavioural theory (availability heuristic) to explaining human interaction with ground leaseholds.

Ownership is a habit of mind: how community land trusts expose key consensual fictions of urban property

ABSTRACT Community land trusts (“CLTs”) have garnered attention as a novel, non-state organizational mechanism for enabling permanently affordable homeownership. In canonical form, they separate a home from the land upon which it sits, holding the land in trust and selling the home for its value without the land. Additionally, CLTs use ground lease restrictions to constrain the resale process and enforce long-term reproduction of affordability. Herein, we argue that given the “actually existing” character of CLT practices, the legal vocabulary CLTs use is not most directly nor most accurately descriptive. The nature of the present intervention is emphatically not to say that CLTs have acted in bad faith; rather, we identify a set of fictions about land and rights encoded into the law regarding real property. Our intervention highlights how the nature of these fictions theoretically constrains the power of canonical community land trusts to transform society and forces critical reflection on specific financial strategies CLTs may attempt.

How a ground lease affects the market value of a hotel

The purpose of this paper is to explore how a land lease may affect the market value of a hotel. Since the 1980s, hotels that sit on ground leases have become increasingly prevalent in urban locations throughout the US. As land becomes dearer and construction costs rise in densely urbanised areas, the frequency of land leases in the development of hotels is likely to increase in the future. To date, research on hotel land leases has primarily been undertaken by appraisers, brokers, hotel owners and/or operators and lawyers, as opposed to the academic community. Furthermore, the literature review identified a gap in research relating to the value implications of a ground lease on hotel investment transactions. As such, the literature review component of this paper focuses on valuation methodologies in hotel investment analyses and approach to leasehold positions, the associated land lease terms and provisions that have an impact on the value and opportunities for value creation by utilising a land lease. To complement the literature review, primary research was undertaken via interviews with hotel owners, operators, appraisers, brokers, mortgage bankers and brand representatives, which provided insight into how the market gauges the impact of a ground lease’s terms and provisions on a hotel asset’s market value. While the sample of stakeholders interviewed was robust, the lessor side of the equation was not sufficiently represented, which represents one limitation of the research. A further limitation was a substantially subjective element in valuation methodology undertaken by the survey respondents. Nonetheless, it is hoped that this research will aid hotel investors, as well as other industry stakeholders, to better understand land leases and their prospective impact on value.

A Generalised Model of Ground Lease Pricing

In this paper, we present a generalization of Mandell’s model for the estimation of ground lease pricing. We adjust the model so that it fits, in particular, the Polish legal regulations and situation of the Polish real estate market. The model involves two aspects. The first is the perpetual usufruct, a form of owning the ground similar to a long-term lease, but having some specific features. The second is allowing lease rent adjustments after some fixed period, meaning we consider the situation where the payments are fixed during certain periods as defined in the contract. The proposed model determines the minimum lease amount for the owner, which is the rate at which it is beneficial to lease the property, and the maximum for the lessee, which is the amount above which the lease is unprofitable for the leaseholder or perpetual usufruct.

The strategic use of time-limited property rights in land-use planning: Evidence from Switzerland

While land-use plans are regularly revised, property rights are extremely stable over time. Yet, the stability of property rights resulting from the current conception of exclusive ownership makes the implementation of land-use plans increasingly complicated, difficult and long. Planners recognized the need for more flexibility in many urban contexts to effectively steer spatial development in the already built environment. Relying on a detailed case study carried out in the municipality of Bienne, Switzerland, this paper examines how a strategic use of long-term ground leases granted on municipal land can allow for increased flexibility in planning. Ground leases are a policy instrument leading to a time-limited division of the bundle of rights between a public landowner and the ground lease holder, who becomes the owner of the facilities on the land for up to one hundred years. The strategic role of ground leases in urban planning remains largely unexplored. This article shows that ground leases are an empirical and practical response of planning authorities to the inflexibility of property rights in given situations where more flexibility would be needed. Public actors can use ground leases to implement an active land policy leading to a better allocation of land to specific projects and to a more precise control of building activity. By analyzing the role of ground leases at the interface between planning and property, this article aims to contribute to a better understanding of the complex relationship between land-use planning and property rights.

The Dutch urban ground lease: A valuable tool for land policy?

Once heralded by both liberals and socialists as a tool for Dutch municipal governments to prevent land speculation and to implement spatial policies, a century later the Dutch ground lease (erfpacht) is now despised by many. The ground lease was the subject of strong debate in the recent past and is likely to remain so. It has been argued that lessees should have the right to become owner of the land, and this ‘right to buy’ has indeed been implemented in the land policies of several municipalities. The Dutch urban ground lease seems to be under serious pressure. Is it outdated or is it still a valuable tool for land policy? Before we answer this question, we firstly will provide an historical overview of Dutch ground lease. Secondly, the different types of ground lease will be elaborated. Thirdly, the focus will be on the urban ground lease used by Dutch municipalities and the developments in the use of this instrument. Fourthly, the recent policy changes will be dealt with, followed by an assessment.

Sustainable housing: A ground lease partnership model

Against the background of strained housing markets, economic, social and ecological targets (e.g. energy-based modernization) may conflict with each other. Against this backdrop, municipal leasehold approaches appear to be interesting. Considering the case of Germany, the legislator designed leasehold rights as an instrument to tackle a variety of targets. However, compliance with the Tinbergen rule suggests that municipalities should focus on economic targets while using leasehold approaches. Nonetheless, they should waive any exploitation of their monopolistic position in the local land market in favor of ground leases that are in line with the capital market. In doing so, public leasehold approaches may create an added value which may help to ease the conflicts between social and ecological targets. In this context, social and ecological targets shouldn’t be pursued by the municipality itself, but in cooperation with suitable partners not looking to maximize their risk/return requirements. However, a number of obstacles have to be removed before leasehold rights can be used in this way.

Overview of the current CRC scheme

Following a significant period of uncertainty the UK Government has confirmed the changes that will be made to the CRC Energy Efficiency Scheme (CRC Scheme) in order to simplify it and reduce the administrative burdens it places on businesses. The CRC Scheme requires non-energy intensive organisations to measure and report on their energy consumption and purchase allowances for the amount of CO2 emissions associated with that consumption. The majority of the changes proposed will come into force from April 2014, however certain changes will come into effect from 1st June, 2013. Key changes for the real estate sector include the surprise abolition of the Performance League Table, the disapplication of the Landlord and Tenant Rule in respect of ground lease arrangements, and new rules in relation to CRC responsibility in Trust situations. The simplification of the CRC Scheme is to be welcomed as many businesses had struggled with its technical complexities, however, fundamental criticisms that the scheme is merely a tax remain. The Government will review the effectiveness of the simplified CRC Scheme in 2016.

A Flexible Test for Present Bias and Time Preferences Using Land-Lease Contracts

When agents have present bias, they discount more between now and the next period than between period t (> 1) and t + 1. How fast the future’s discount rate evaluated today decays is an empirical question. We show that the discount function can be non-parametrically identified using contracts that specify payments that take place at various points in time in the future and which are traded and priced in a market. We then use ground lease data from Amsterdam which have this characteristic to test for present bias in a flexible way. We find that a general-hyperbolic specification performs best, but that it is only slightly prefered above the much simples exponential specification.

Ground rental rates and ratchet clauses

AbstractThe 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.

Ground Lease-Based Land Use System Versus Common Interest Development

In recent decades, we observe brisk growth of ground lease-based land use systems, such as shopping centers and malls, and Common Interest Developments in retail and residential real estate, respectively. I argue that the ground lease system is an efficient response to the hold-up problem in urban land use, which is due to two spatial facts: the bundled consumption of a private good (land) and collective goods, and limited ex post mobility of landowners. The ground lease system incorporates the core merits of the Henry George view combined with Tiebout competition. But, bundled consumption may also require a tradeoff in property rights. The different characteristics of retail and residential real estate determine the dominance of the ground lease systems and CIDs, respectively.

Collective Goods and the Political Hold-Up Problem

By extending the incomplete contract model to the provision of local collective goods, this paper formally analyzes the political hold-up problem between landowner and collective goods provider in urban land use. The model focuses on three-party contractual relationship and analyzes the impact of wage and rent capitalization, symmetric or asymmetric. The findings indicate that it is efficient to integrate landowner and collective goods provider when there is uncertainty in the provision of collective goods. This has been demonstrated by the growth of ground lease system and CIDs in recent decades. Rent capitalization further strengthens the conclusion. Under asymmetric rent capitalization, it is more efficient for landowner to acquire all non-mobile assets. Similarities and differences between urban institutions and the firm are also discussed. If management is regarded as a collective good, the findings in this paper may also shed light on a unifying theme between urban institutions and the firm. The difference between them lies mainly on the choice of political voting vs. corporate voting and the importance of externality for urban institutions.

Collective Goods and the Political Hold-Up Problem

By extending the incomplete-contract model to the provision of local collective goods, this paper analyzes the political hold-up problem in urban land use. The model focuses on three-party contractual relationships and analyzes the effects of wage and rent capitalization, symmetric or asymmetric. The findings indicate that, in the face of uncertainty in collective-goods provision, it is efficient to integrate landowner and collective-goods provider, as demonstrated by the growth of the ground lease system and common-interest developments in recent decades. Rent capitalization further strengthens the result. Similarities and differences between urban institutions and the firm are also discussed.

Ground Lease-Based Land Use System versus Common Interest Development

<i>In recent decades, we observe brisk growth of ground lease-based land use systems, such as shopping malls, and Common Interest Developments in retail and residential real estate, respectively. I argue that the ground lease system is an efficient response to the hold-up problem in urban land use because of two facts: the bundled consumption of land and collective goods, and landowners’ limited</i> ex-post <i>mobility. It incorporates the core insight of Henry George view with Tiebout competition. But, due to bundled consumption, different characteristics of retail and residential real estate determine the dominance of the ground lease systems and CIDs, respectively.</i> (JEL R52)

Lessor and lessee perspectives on ground lease pricing

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.

Financing the Airport Light Rail Line in Portland, Oregon

Airport MAX is a 5.5 mile light rail project in Portland, Oregon, connecting the city9s public transit system to its airport. Bechtel Enterprises, the designer and builder of the facility, received in return for its services an 85-year ground lease on 120 acres of commercial property that it is developing with its partner, Trammel Crow. The $125 million cost of the light rail facility was financed jointly by the City of Portland; the Port of Portland; the Portland Development Commission; Tri-Met, the public transportation authority; and Cascade Station Development Company, the Bechtel-Trammel Crow joint venture. The interagency cooperation required to structure this complex undertaking was facilitated by a collegial management style and long-term working relationships among parties in the various organizations involved.

THE USE OF EQUATED YIELD TECHNIQUES: A CASE STUDY

This paper considers the valuation in 1982 of the freehold interest in an industrial estate. The freeholder has granted a ground lease to a developer who has over a period of years constructed and let a number of factory and warehouse units. The ground rent is geared to a percentage of the rack rents on review every seven years. The majority of the occupation leases of the units on the estate are on a five‐yearly rent review basis with one unit on a three yearly rent review basis.