Controlling the Incentive Problems in Real Estate Leasing

John D Benjamin, Cris de la Torre and Jim Musumeci

The Journal of Real Estate Finance and Economics, 1995, vol. 10, issue 2, 177-91

Abstract: This paper develops a formal model that characterizes potential conflicts of interest between real-estate landlords and tenants. The model demonstrates a tenant's incentive to undermaintain overuse (i,e., abuse) a leased property while highlighting the moral hazard problem as a cause of the failure of the lease irrelevance proposition. As a consequence, the lease irrelevance proposition's failure implies that if tenant abuse incentives are left unrestricted, the market for leased real estate may cease to function. he efficacies of various lease arrangements suggested by Smith and Wakeman (1985) and other researchers in controlling the tenant abuse incentives are evaluated in this framework as a means of counteracting the inherent problems. Our analysis supports the greater use of variable lease schemes (e.g., security deposits and penalty clauses), which peg real-estate lease rates to the level of property abuse rather than more traditional fixed payment contracting arrangements. Copyright 1995 by Kluwer Academic Publishers

Date: 1995
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