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Valuing Retail Shopping Center Lease Contracts
Author(s) -
Cho Hoon,
Shilling James D.
Publication year - 2007
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/j.1540-6229.2007.00203.x
Subject(s) - lease , center (category theory) , underwriting , database transaction , economics , payment , business , value (mathematics) , microeconomics , actuarial science , finance , computer science , database , chemistry , machine learning , crystallography
In this article we set up a real option model of retail shopping center leases. The model incorporates the effects of stochastic sales externalities and the possibility of tenant default, and in the presence of these effects, we derive and solve a partial differential equation that can be used to price a lease transaction. The model then sums across all tenants to determine the value of the shopping center. The model generates a number of new predictions, including why a Jorgensonian user cost of capital may overestimate shopping center values, why the general industry practice is to ignore percentage rent payments and tenant default risk in commercial mortgage underwriting and why shopping center owners may not act opportunistically as most observers seem to think they do.