How Does a Development Moratorium Affect
Development Timing Choices and Land Values?
Tan (Charlene) Lee
Published online: 9 May 2009
Springer Science + Business Media, LLC 2009
Abstract This paper investigates how a development moratorium affects choices of
development timing and land values in a framework where both the value of de-
veloped property evolves stochastically and the development costs are fully ir-
reversible. We assume that a regulator initially announces that land is not allowed to
be developed during a finite period of time in the future. A developer, thus, must
decide whether to develop land before the timing ordinance is imposed, or after it
expires. The development moratorium reduces the developer’s option value from
waiting and, thus, accelerates development. We also use simulation analysis to dem-
onstrate how the other factors that relate to the demand and supply conditions of the
real estate market affect this accelerating effect.
Keywords American options
JEL classification G13
J Real Estate Finan Econ (2009) 39:301–315
Department of Economics and Finance, Massey University Albany Campus, North Shore,
Graduate Institute of National Development, National Taiwan University, Taipei, Taiwan, R. O. C.
T. Lee (*)
Department of Accounting and Finance, The University of Auckland Business School,
Private Bag 92019, Auckland 1142, New Zealand