Identifying Risk-Adjusted Indifference Rents for Alternative Operating Leases

Abstract

For some time real estate operating leases have been available to lessees and lessors which have alternative schemes for allocating the purchasing power risk embedded in the rent and operating expense streams. This paper presents a market-oriented model that will allow lessees and/or lessors to efficiently evaluate and compare alternative leases. Using the model it is possible to identify a set of risk-adjusted rents for alternative leases between which the evaluator is indifferent. Knowledge of this set of indifference rents places the model user in a superior position during the lease negotiation process.