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Valuing Retail Shopping Center Lease Contracts

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  • Hoon Cho
  • James D. Shilling

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.

Suggested Citation

  • Hoon Cho & James D. Shilling, 2007. "Valuing Retail Shopping Center Lease Contracts," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 35(4), pages 623-649, December.
    • Handle: RePEc:bla:reesec:v:35:y:2007:i:4:p:623-649
    DOI: 10.1111/j.1540-6229.2007.00203.x
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    Cited by:

    1. Joseph Williams, 2014. "Percentage Rents with Agency," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 42(4), pages 791-828, December.
    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.
    3. Thomas J. Miceli & C.F. Sirmans & Geoffrey K. Turnbull, 2009. "Lease Defaults And The Efficient Mitigation Of Damages," Journal of Regional Science, Wiley Blackwell, vol. 49(5), pages 915-930, December.
    4. Brent Ambrose & Michael Shafer & Yildiray Yildirim, 2018. "The Impact of Tenant Diversification on Spreads and Default Rates for Mortgages on Retail Properties," The Journal of Real Estate Finance and Economics, Springer, vol. 56(1), pages 1-32, January.
    5. Fan, Gang-Zhi & Pu, Ming & Deng, Xiaoying & Ong, Seow Eng, 2018. "Optimal portfolio choices and the determination of housing rents under housing market uncertainty," Journal of Housing Economics, Elsevier, vol. 41(C), pages 200-217.
    6. 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.
    7. Yi-Long Hsiao & Chien-Jung Ting, 2022. "Pricing Rent-to-Own Options with a Barrier Level: Taking Housing Contracts as an Example," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 12(5), pages 1-3.
    8. Song Zhang & Mark Duijn & Arno J. Vlist, 2023. "Tenant Mix and Retail Rents in High Street Shopping Districts," The Journal of Real Estate Finance and Economics, Springer, vol. 67(1), pages 72-107, July.

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