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Percentage Rent in Retail Leasing: The Alignment of Landlord-Tenant Interests

  • William C. Wheaton
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    Only retail tenants pay their landlord a percentage of revenue in addition to the traditional fixed rent. The latter has often been shown to vary widely across stores-inverse to the sales externalities generated by the store. This paper demonstrates that revenue percentages vary widely as well, and positively with fixed rent (sales externalities). It is then argued that existing theoretical explanations for percentage rent (involving generic risk sharing and tenant effort issues) are not specific to the retail sector and apply to all tenant-landlord relationships. Instead, a model is proposed where percentage rent gives the correct incentive to landlords-rather than to tenants. In this model, percentage rent ensures that with sales externalities, landlords do not act opportunistically and always have the interest of existing tenants in mind when expanding, altering or reletting space in a shopping center. Copyright American Real Estate and Urban Economics Association.

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

    Volume (Year): 28 (2000)
    Issue (Month): 2 ()
    Pages: 185-204

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    Handle: RePEc:bla:reesec:v:28:y:2000:i:2:p:185-204
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