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

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 themodel.

Agarwal, Sumit and Ambrose, Brent W. and Huang, Henry Hongren and Yildirim, Yildiray, The Term Structure of Lease Rates with Endogenous Default Triggers and Tenant Capital Structure: Theory and Evidence (February 26, 2009). Available at SSRN: https://ssrn.com/abstract=1409129 or http://dx.doi.org/10.2139/ssrn.1409129