The Structure of a Retail Lease

John D. Benjamin () and Peter Chinloy ()
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John D. Benjamin: AMERICAN UNIVERSITY
Peter Chinloy: AMERICAN UNIVERSITY

Journal of Real Estate Research, 2004, vol. 26, issue 2, pages 223-236

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.

JEL-codes: L85 (search for similar items in EconPapers)
Date: 2004

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