Commercial Real Estate Leasing Research Articles

Contracting and Optimal Rents in Commercial Real Estate Leasing

Contracting and Optimal Rents in Commercial Real Estate Leasing

Do Large-Scale Owners Enjoy Brand-Induced Premiums?

Executive SummaryIn this paper, we examine the impact of large-scale ownership on commercial real estate rent and selling price premiums. We also examine whether ENERGY STAR premiums found in the literature are a result of a signal for an ownership brand effect rather than the label itself. The results suggest that large-scale owners generate significant market rental premiums, indicating a potential brand effect. The effect of sales prices is mixed when buyers manage the property. We argue that large scale owners create a brand effect by reducing information asymmetry in the commercial real estate leasing market. The results show that the price and rental premiums associated with the ENERGY STAR designation might signal the brand effect to the market.

Options for quantitative assessment of types of commercial real estate leases

Abstract Facing increasing business volumes and internationalisation, office lease issue is becoming increasingly relevant to business enterprises. They become an integral part of the business which determines the outcome of commercial activities. Current assessment methodologies for types of office leases are flawed because they lack comprehensiveness and they are not linked to the objective of a lease, that is improvement of business deliverables. The methods for quantitative assessment of lease types are flawed. The objective of this article is developing a hierarchical system of indicators in connection with commercial real estate (office) leases adapted for quantitative assessment using multi-criteria methods. As a result of the research, it has been obtained that such system contains three categories: economic, premises and environmental. 12 indicators fall into the first one, 24 - into the second and 16 - into the third one.

Leases and Executory Contracts in Chapter 11

This article offers the first empirical analysis of the timing and disposition decisions large Chapter 11 debtors make with respect to their leases and other bilateral (“executory”) contracts in bankruptcy, with an emphasis on commercial real estate leases. Section 365, which governs these contracts, allows debtors to choose whether to keep (“assume”), abandon (“reject”), or transfer (“assign”) their contracts, with time limits provided by the Bankruptcy Code. The main goal of the article is to analyze a controversial change to the Code in 2005 (BAPCPA) that shortens the time to expiration of a debtor's option to reject, requiring tenant‐debtors to make decisions on their real estate leases within seven months unless a landlord grants an extension. I find that the seven‐month limit strongly accelerated real estate lease disposition decisions, suggesting that bankruptcy bargaining is far from a frictionless, Coasean world. Further, I find that BAPCPA is associated with a significantly lower probability of reorganization for the most lease‐intensive firms. I also test a simple theory of real options, and I find that debtors do not behave as the simple theory suggests. In particular, many executory contracts are assumed before expiration. I present suggestive evidence of implicit contracting motives: debtors often assume early in order to secure performance from their counterparties that cannot be guaranteed by the contract alone.

Leases and Executory Contracts in Chapter 11

This paper offers the first empirical analysis of the timing and disposition decisions large Chapter 11 debtors make with respect to their leases and other bilateral (“executory”) contracts in bankruptcy, with an emphasis on commercial real estate leases. Section 365 of the Bankruptcy Code, which governs these contracts, provides debtors with a rich set of strategic options that can be analyzed from a real options framework. The debtor can choose to keep (“assume”), abandon (“reject”), or transfer (“assign”) their contracts, with time limits provided by the Bankruptcy Code. I analyze the effect of a change to the Code in 2005 (BAPCPA) that shortens the time to expiration of a debtor’s option to reject, requiring tenant-debtors to make decisions on their real estate leases within seven months unless a landlord grants an extension.This paper offers several new findings. The distribution of leases and executory contracts across firms is highly skewed; for debtors at the tails, leases are quite important. At the 90th percentile, leases comprise 46.4% of the firm’s assets and over 70% of its financial liabilities. The main use of assignment in bankruptcy is to facilitate sales, rather than restructurings: over 90% of contract assignments occur in the context of sales of business units or the whole firm. I find that the seven month limit strongly accelerated real estate lease disposition decisions, suggesting that bankruptcy bargaining is far from a frictionless, Coasean world. Further, I find that BAPCPA is associated with a significantly lower probability of reorganization for the most lease-intensive firms.While debtors’ behavior is in some ways consistent with a simple real options theory, I find important deviations. In particular, some executory contracts are assumed before expiration. I present suggestive evidence of implicit contracting motives: debtors often assume early in order to secure performance from their counterparties that cannot be guaranteed by the contract alone.

On the Choice between a Sale-Leaseback and Debt

This article introduces decision models for commercial real estate leasing. The concepts and models developed in the article can also be applied to equipment leasing and other types of leasing.

Contracting and Optimal Rents in Commercial Real Estate Leasing.

Contract Incompleteness in commercial real estate is a function of many variables and determines the long term values/benefits of leasing. This article introduces new models for contract completeness and optimal rents in commercial real estate leasing. The concepts and models developed in the article can also be applied to equipment leasing and other types of leasing.

Litigation Decisions in Commercial Real Estate Leasing

This article introduces dispute resolution and litigation models for commercial real estate leasing. The concepts and models developed in the article can also be applied to equipment leasing and other types of leasing.

Decisions in commercial real estate leasing in the real estate sector

This article develops analytical models for key decisions in commercial real estate leasing (the concepts and models developed in the article can also be applied to equipment leasing and other types of leasing).

Litigation decisions in commercial real estate leasing

This article introduces dispute resolution and litigation models for commercial real estate leasing. The concepts and models developed in the article can also be applied to equipment leasing and other types of leasing

On the choice between a sale-leaseback and debt

This article introduces decision models for commercial real estate leasing. The concepts and models developed in the article can also be applied to equipment leasing and other types of leasing

Decisions in Commercial Real Estate Leasing in Thereal Estate Sector

Decisions in Commercial Real Estate Leasing in Thereal Estate Sector

An Equilibrium Analysis of Real Estate Leases

This article provides a unified equilibrium approach to valuing commercial real estate leases. Using a game‐theoretic variant of real options analysis, the underlying real estate asset market is modeled as a continuous‐time Nash equilibrium, where developers make construction decisions under demand uncertainty. Then, using the economic notion that leasing represents the purchase of the use of the asset over a specified time, I use a contingent‐claims approach to value many of the most common leasing arrangements. The model provides equilibrium values for purchase options, forward leases, gross and net leases, cancellation options, ground leases, escalation clauses, lease concessions, and sale‐leasebacks.

Exploitation, Expropriation and Capital Assets: The Economics of Commercial Real Estate Leases

This study reviews commercial real estate leases as one transaction form to finance corporate capital assets. Credit risk is common to leases and debt as substitute transactions; but the two credit forms generate different transaction costs and agency conflicts, and thus differential pricing. Causal relationships resulting in explicit options in leases reflect complex agency considerations, which complicate the application of current option pricing principles to value the options. In general, it seems as if lease pricing phenomena are poorly researched. This article aims to identify where more narrowly demarcated research could assist in unraveling lease pricing behavior.

Commercial Real Estate Leasing, Asymmetric Information, and Monopolistic Competition

We model the choice of lease type, gross lease versus net lease, in an environment in which lessees have private information with respect to their expected intensity of utilization of the leased space, and in which lessors have market power with respect to the pricing of the lease. Unless the lessor can provide operating services at lower cost than the lessee, there exists a lemons problem. We examine a market in which lessors can provide operating services at lower cost. Given asymmetric information with respect to expected lessee utilization and/or damage to the leased space, the lessor offers both a gross and net lease, where the higher expected utilization lessees select the gross lease and the lower expected utilization lessees select a net lease. Lease pricing depends on both the lessor’s beliefs with respect to lessee utilization of the space and the lessor’s market power. In a monopolistic market, relative to a competitive market, a lessor charges higher rent for a gross lease relative to a net lease in order to extract a portion of the gain from shifting operating services to the lessor. Given the higher rent for a gross lease, a smaller proportion of lessees (only very high utilization lessees) selects a gross lease in a monopolistic market. Therefore, the expected cost savings associated with shifting operating services/provision of maintenance to the lessor are smallest in a monopolistic market.

Cancellation Strategies in Commercial Real Estate Leasing

In a contractionary corporate environment, lease cancellation strategy becomes an important component of corporate real estate leasing decisions. This paper presents a leasing model in which less well-informed lessors offer leases with alternative lease cancellation options. The model demonstrates that a tenant's choice of cancellation option reveals his private information with respect to the likelihood of option exercise. Tenants who select a lease with a downsizing option are more likely to exercise the option. Given the higher likelihood of option exercise, the model suggests that the downsizing option will be priced higher. We examine a sample of 311 leases, and consistent with the model's prediction, we find that on average leases with a downsizing option have significantly higher contract rent. However, termination and sublet options are not associated with higher rent. The evidence suggests that market uncertainty, private information and adverse selection affect the pricing of alternative cancellation options and the choice of cancellation option.

Rationales for Real Estate Leasing versus Owning

In this article, rationales for the widespread existence of commercial real estate leasing are examined. Given the tendency of tenants to abuse property to their own advantage, there must be powerful incentives on the other side to encourage landlords and property managers to participate in the widespread practice of leasing. We suggest that common leasing practices are the consequence of many rationales, including the ability of the landlord to solve free-rider problems in maintaining property desirability and informational asymmetries that exist between landlords and tenants.