Valuing rights of first refusal for farmland preservation policy

Abstract

The economic literature has failed to derive an explanation for the current value of rights of first refusal (ROFR) that may or may not manifest at some future time. A model explains this ex ante value in the context of agricultural land that may be converted to developed uses in the future. The results should help governments decide what prices should be paid to farmers for ROFR in urbanizing areas. ROFR ensure that governments have the opportunity to match a land developer's price for important agricultural parcels. Governments can then impose a conservation easement and market the land to farmers. Compared to traditional conservation easement policy, the ROFR variant should be cost effective because only parcels truly threatened with conversion are preserved.

Notes

ROFR is the ‘right to meet terms of proposed contract before it is executed’ (Nolan, 1990). Unlike options in which the rightholder triggers the transaction, ROFR are conditional only on the seller's decision to market the good. ROFR also differ from options in that they do not necessarily require a specified time period in which they can be exercised.

Evidence of ROFR value emerges from real estate litigations (see Stuart Kingston, Inc. v. Robinson, 596 A.2d 1378, 1991) and in academic work (Blumenfeld and Rowe, 2000).

This feature implies that ROFR has ex ante value to B if he or she believes that sales time is likely to occur later than T_R .