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The Structure of a Retail Lease

Author

Listed:
  • John D. Benjamin

    () (AMERICAN UNIVERSITY)

  • Peter Chinloy

    () (AMERICAN UNIVERSITY)

Abstract

This paper develops an option-theoretic model of a retail lease. The standard retail lease contains provisions for a security deposit, a base rent, and a percentage rent or a sharing between landlord and tenant of rent revenue above a preset sales threshold or break point level. The findings show that the tradeoff between the security deposit and base rent provisions is independent of percentage rent. The function of the security deposit and percentage rent is to sort separate tails of the distribution of tenants and landlords. Low-quality tenants are charged higher security deposits or are sorted from other tenants by their inability to pay them. High-quality tenants use percentage rent provisions as a method of distinguishing between landlords. Landlords who maintain capital expenditures and who have financial staying power are more likely to collect percentage rent.

Suggested Citation

  • John D. Benjamin & Peter Chinloy, 2004. "The Structure of a Retail Lease," Journal of Real Estate Research, American Real Estate Society, vol. 26(2), pages 223-236.
  • Handle: RePEc:jre:issued:v:26:n:2:2004:p:223-236
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    File URL: http://pages.jh.edu/jrer/papers/pdf/past/vol26n02/05.223_236.pdf
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    Citations

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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. Hovhannisyan, Vardges & Bozic, Marin, 2016. "The Relationship Between Price And Market Structure: Evidence From The Us Food Retail Industry," 2016 Annual Meeting, July 31-August 2, 2016, Boston, Massachusetts 236222, Agricultural and Applied Economics Association.

    More about this item

    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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