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Valuing Retail Shopping Center Lease Contracts

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  • Hoon Cho
  • James D. Shilling
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    Abstract

    In this article we set up a real option model of retail shopping center leases. The model incorporates the effects of stochastic sales externalities and the possibility of tenant default, and in the presence of these effects, we derive and solve a partial differential equation that can be used to price a lease transaction. The model then sums across all tenants to determine the value of the shopping center. The model generates a number of new predictions, including why a Jorgensonian user cost of capital may overestimate shopping center values, why the general industry practice is to ignore percentage rent payments and tenant default risk in commercial mortgage underwriting and why shopping center owners may not act opportunistically as most observers seem to think they do. Copyright 2007 American Real Estate and Urban Economics Association

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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6229.2007.00203.x
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    Bibliographic Info

    Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

    Volume (Year): 35 (2007)
    Issue (Month): 4 (December)
    Pages: 623-649

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    Handle: RePEc:bla:reesec:v:35:y:2007:i:4:p:623-649

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    Cited by:
    1. Navarro, Ignacio & Turnbull, Geoffrey K., 2010. "Antichresis leases: Theory and empirical evidence from the Bolivian experience," Regional Science and Urban Economics, Elsevier, vol. 40(1), pages 33-44, January.
    2. John Clapp & Katsiaryna Bardos & Tingyu Zhou, 2014. "Expansions and Contractions of Major US Shopping Centers," The Journal of Real Estate Finance and Economics, Springer, vol. 48(1), pages 16-56, January.

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