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An Equilibrium Analysis of Real Estate Leases

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  • Steven R. Grenadier

    (Graduate School of Business, Stanford University)

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    Abstract

    This article provides a unified equilibrium approach to valuing commercial real estate leases. Using a game-theoretic variant of real options analysis, the underlying real estate asset market is modeled as a continuous-time Nash equilibrium, where developers make construction decisions under demand uncertainty. Then, using the economic notion that leasing represents the purchase of the use of the asset over a specified time, I use a contingent-claims approach to value many of the most common leasing arrangements. The model provides equilibrium values for purchase options, forward leases, gross and net leases, cancellation options, ground leases, escalation clauses, lease concessions, and sale-leasebacks.

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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Business.

    Volume (Year): 78 (2005)
    Issue (Month): 4 (July)
    Pages: 1173-1214

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    Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:4:p:1173-1214

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    Web page: http://www.journals.uchicago.edu/JB/

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    Cited by:
    1. Seko, Miki & Sumita, Kazuto & Yoshida, Jiro, 2012. "Downward-sloping term structure of lease rates: a puzzle," MPRA Paper 37395, University Library of Munich, Germany.
    2. Maria Ibanez & Anthony Pennington-Cross, 2013. "Commercial Property Rent Dynamics in U.S. Metropolitan Areas: An Examination of Office, Industrial, Flex and Retail Space," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 46(2), pages 232-259, February.
    3. Jyh-Bang Jou & Tan (Charlene) Lee, 2009. "How Does a Development Moratorium Affect Development Timing Choices and Land Values?," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 39(3), pages 301-315, October.
    4. James Shilling & C. Sirmans & Barrett Slade, 2013. "Who Says there is a High Consensus Among Analysts when Market Uncertainty is High? Some New Evidence from the Commercial Real Estate Market," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 47(4), pages 688-718, November.
    5. Honglin Wang & Fan Yu & Yinggang Zhou, 2013. "Rental Rates under Housing Price Uncertainty: A Real Options Approach," Working Papers 242013, Hong Kong Institute for Monetary Research.

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