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Security Deposits, Adverse Selection and Office Leases

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  • John D. Benjamin
  • James D. Shilling
  • C. F. Sirmans

Abstract

Our focus in this article is on the extent to which security deposits allow landlords to contract on the intensity with which tenants utilize office space. Much existing discussion recognizes that landlords expect some tenants to be more opportunistic than others, but that landlords often cannot predict a tenant's future behavior. As a consequence, landlords will charge all tenants, both low-utilization and high-utilization ones, a rental externality premium. This rental externality premium gives low-utilization tenants (or tenants with better credit quality than the market perceives) a strong incentive to sort themselves out. Our findings suggest that office rental contracts with large up-front security deposits are one way in which different tenant types can sort themselves out. Such contracts reduce landlord uncertainty and imply rental discounts in excess of the foregone interest on the deposit monies. Copyright American Real Estate and Urban Economics Association.

Suggested Citation

  • John D. Benjamin & James D. Shilling & C. F. Sirmans, 1992. "Security Deposits, Adverse Selection and Office Leases," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 20(2), pages 259-272.
  • Handle: RePEc:bla:reesec:v:20:y:1992:i:2:p:259-272
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    Cited by:

    1. Miceli, Thomas J. & Sirmans, C. F., 1999. "Tenant Turnover, Rental Contracts, and Self-Selection," Journal of Housing Economics, Elsevier, vol. 8(4), pages 301-311, December.
    2. Barker, David, 2003. "Length of residence discounts, turnover, and demand elasticity. Should long-term tenants pay less than new tenants?," Journal of Housing Economics, Elsevier, vol. 12(1), pages 1-11, March.
    3. repec:eee:regeco:v:66:y:2017:i:c:p:150-174 is not listed on IDEAS

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