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


  • William C. Wheaton


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.

Suggested Citation

  • William C. Wheaton, 2000. "Percentage Rent in Retail Leasing: The Alignment of Landlord-Tenant Interests," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 28(2), pages 185-204.
  • Handle: RePEc:bla:reesec:v:28:y:2000:i:2:p:185-204

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    References listed on IDEAS

    1. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    2. Bostic, Raphael W. & Gans, Joshua S. & Stern, Scott, 1997. "Urban Productivity and Factor Growth in the Late Nineteenth Century," Journal of Urban Economics, Elsevier, vol. 41(1), pages 38-55, January.
    3. Robert B. Avery & Raphael W. Bostic & Paul S. Calem & Glenn B. Canner, 1999. "Trends in home purchase lending: consolidation and the Community Reinvestment Act," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Feb, pages 81-102.
    4. Douglas D. Evanoff & Lewis M. Segal, 1996. "CRA and fair lending regulations: resulting trends in mortgage lending," Economic Perspectives, Federal Reserve Bank of Chicago, issue Nov, pages 19-46.
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    Cited by:

    1. Gokhan Guven & Eren Inci & Antonio Russo, 2017. "Apparent Competition in Two-Sided Platforms," CESifo Working Paper Series 6660, CESifo Group Munich.
    2. Moussawi-Haidar, Lama & Çömez-Dolgan, Nagihan, 2017. "Percentage rent contracts between co-stores," European Journal of Operational Research, Elsevier, vol. 258(3), pages 912-925.
    3. Ersoy, Fulya Yuksel & Hasker, Kevin & Inci, Eren, 2016. "Parking as a loss leader at shopping malls," Transportation Research Part B: Methodological, Elsevier, vol. 91(C), pages 98-112.
    4. Takeaki Kariya & Yasuyuki Kato & Tomonori Uchiyama & Takashi Suwabe, 2005. "Tenant Management and Lease Valuation for Retail Properties: A Real Options Approach," International Real Estate Review, Asian Real Estate Society, vol. 8(1), pages 44-82.
    5. Francois Des Rosiers & Marius Theriault & Catherine Lavoie, 2009. "Retail Concentration and Shopping Center Rents - A Comparison of Two Cities," Journal of Real Estate Research, American Real Estate Society, vol. 31(2), pages 165-208.
    6. Brent Ambrose & Michael Shafer & Yildiray Yildirim, 2015. "The Impact of Tenant Diversification on Spreads and Default Rates for Mortgages on Retail Properties," ERES eres2015_299, European Real Estate Society (ERES).
    7. Konishi, Hideo & Sandfort, Michael T., 2003. "Anchor stores," Journal of Urban Economics, Elsevier, vol. 53(3), pages 413-435, May.
    8. repec:kap:jrefec:v:56:y:2018:i:1:d:10.1007_s11146-016-9579-7 is not listed on IDEAS
    9. Eagling, Lawrence E. & Ashton, Elizabeth C. & Eagle, Josh, 2015. "The incentives of a resource owner: Evidence from a private oyster fishery," Marine Policy, Elsevier, vol. 58(C), pages 28-35.

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