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

Yongqiang Chu and Timothy Riddiough

Journal of Real Estate Research, 2014, vol. 36, issue 1, 1-40

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 welfaremaximizing contract is also analyzed and policy implications are discussed.

Date: 2014
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DOI: 10.1080/10835547.2014.12091384

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