The Structure of a Retail Lease

14 Pages Posted: 3 Jan 2007

See all articles by John D. Benjamin

John D. Benjamin

American University - Kogod School of Business

Peter T. Chinloy

American University - Department of Finance and Real Estate

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.

Keywords: retail lease, rent, revenue, sales threshold, security deposit

JEL Classification: L85, G12, C12, C44, C51, C52, C67

Suggested Citation

Benjamin, John D. and Chinloy, Peter, The Structure of a Retail Lease. Journal of Real Estate Research, Vol. 26, No. 2, 2004, Available at SSRN: https://ssrn.com/abstract=954755

John D. Benjamin (Contact Author)

American University - Kogod School of Business ( email )

4400 Massachusetts Avenue NW
Department of Finance
Washington, DC 20016
United States
(202) 885-1892 (Phone)
(202) 885-1946 (Fax)

Peter Chinloy

American University - Department of Finance and Real Estate ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States
202-885-1951 (Phone)
202-885-1992 (Fax)

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