Working Paper: NBER ID: w9475
Authors: Steven R. Grenadier
Abstract: This paper provides a unified equilibrium approach to valuing a wide variety of commercial real estate lease contracts. Using a game-theoretic variant of real options analysis, the underlying real estate asset market is modeled as a continuous-time Nash equilibrium in which developers make construction decisions under demand uncertainty. Then, using the economic notion that leasing simply represents the purchase of the use of the asset over a specified time frame, I use a contingent-claims approach to value many of the most common real estate leasing arrangements. In particular, the model provides closed-form solutions for the equilibrium valuation of leases with options to purchase, pre-leasing, gross and net leases, leases with cancellation options, ground leases, escalation clauses, lease concessions and sale-leasebacks.
Keywords: No keywords provided
JEL Codes: G12; G13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Lease Value (D46) | Building Value (D46) |
| Competition among Developers (L17) | Lease Rates (R33) |
| Competition among Developers (L17) | Building Values (D46) |
| Lease Structures (G32) | Tenant Behavior (R21) |
| Lease Structures (G32) | Landlord Strategies (R21) |