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The Structure of a Retail Lease

  • John D. Benjamin

    ()

    (AMERICAN UNIVERSITY)

  • Peter Chinloy

    ()

    (AMERICAN UNIVERSITY)

Registered author(s):

    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.

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    File URL: http://pages.jh.edu/jrer/papers/pdf/past/vol26n02/05.223_236.pdf
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    Article provided by American Real Estate Society in its journal Journal of Real Estate Research.

    Volume (Year): 26 (2004)
    Issue (Month): 2 ()
    Pages: 223-236

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    Handle: RePEc:jre:issued:v:26:n:2:2004:p:223-236
    Contact details of provider: Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
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    Order Information: Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
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