Ground rental rates and ratchet clauses

Martin Lally and John Randal

Accounting and Finance, 2004, vol. 44, issue 2, 187-202

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.

Date: 2004
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