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Percentage Rents and Stand-Alone Property: Share Contracting as a Barrier to Entry

Author

Listed:
  • Yongqiang Chu

    () (University of South Carolina)

  • Timothy J. Riddiough

    () (University of Wisconsin-Madison)

Abstract

Share (percentage rent) lease contracts have not been explained in the case of stand-alone property. To do so we develop a model of a local trade area with an incumbent retail tenant that makes non-contractable specific investment at the time of initial contracting and a monopolist landlord that controls the timing of follow-on entry. We show that a two-part share contract is optimal, in which a positive fraction of sales revenues is passed from the retail tenant to the landlord. The standard percentage rent contract is, however, dominated by an enhanced contract that includes a lump-sum payment made by the landlord to the incumbent tenant at the time of competitive entry. The welfare-maximizing contract is also analyzed and policy implications are discussed.

Suggested Citation

  • Yongqiang Chu & Timothy J. Riddiough, 2014. "Percentage Rents and Stand-Alone Property: Share Contracting as a Barrier to Entry," Journal of Real Estate Research, American Real Estate Society, vol. 36(1), pages 1-40.
  • Handle: RePEc:jre:issued:v:36:n:1:2014:p:1-40
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    JEL classification:

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

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