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The Term Structure of Lease Rates with Endogenous Default Triggers and Tenant Capital Structure: Theory and Evidence

Published online by Cambridge University Press:  06 January 2011

Sumit Agarwal ,
Brent W. Ambrose ,
Hongming Huang  and
Yildiray Yildirim
Sumit Agarwal
Affiliation:
Economic Research, Federal Reserve Bank of Chicago, 230 S. LaSalle St., Chicago, IL 60604. ushakri@yahoo.com
Brent W. Ambrose
Affiliation:
Institute for Real Estate Studies, Pennsylvania State University, University Park, PA 16802. bwa10@psu.edu
Hongming Huang
Affiliation:
Department of Finance, National Central University, No. 300, Jung-da Rd., Jung-Li, Taiwan 320, R.O.C. hongming@ncu.edu.tw
Yildiray Yildirim
Affiliation:
Whitman School of Management, Syracuse University, 721 University Ave., Ste. 500, Syracuse, NY 13244. yildiray@syr.edu
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Abstract

This paper focuses on the defaultable lease rate term structure with endogenous default. We combine the competitive lease market argument proposed by Grenadier (1996) and the endogenous default structural model proposed by Leland and Toft (1996) to examine the interaction between the lessee’s capital structure and the equilibrium lease rate. Under this framework, determining the lease rate is a simultaneous equation problem that captures the trade-off between debt and lease financing. Using data on 2,482 real estate lease transactions, we empirically confirm the predictions derived from the numerical analysis of the model.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 2 , April 2011 , pp. 553 - 584
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

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