The Rent Term Premium for Cancellable Leases

47 Pages Posted: 18 Mar 2012 Last revised: 22 Apr 2016

See all articles by Jiro Yoshida

Jiro Yoshida

Pennsylvania State University - Smeal College of Business; The University of Tokyo - Graduate School of Economics

Miki Seko

Keio University - Faculty of Economics

Kazuto Sumita

Kanazawa Seiryo University

Date Written: August 12, 2015

Abstract

This study analyzes the rent term premium for leases that can be cancelled by the lessee. We model the lessor’s trade-off between leasing costs and the cost of cancellation options based on the recognition that many leases are cancellable by lessees, and lease markets involve significant transaction costs. We demonstrate that, regardless of the expected future rents, the rent term structure is upward-sloping when there is no leasing cost but U-shaped when the lessor faces moderate leasing costs. Residential leases in Japan, which are all cancellable by tenants, exhibit the term structure that is consistent with our calibrated model.

Keywords: leasing, housing, asset pricing, cancellation options, term structure, expectations hypothesis, transaction costs, hedonic regression, Japan

JEL Classification: G12, G13, R31

Suggested Citation

Yoshida, Jiro and Seko, Miki and Sumita, Kazuto, The Rent Term Premium for Cancellable Leases (August 12, 2015). Journal of Real Estate Finance and Economics, Vol. 52, No. 4, 2016. Available at SSRN: https://ssrn.com/abstract=2024977 or http://dx.doi.org/10.2139/ssrn.2024977

Jiro Yoshida (Contact Author)

Pennsylvania State University - Smeal College of Business ( email )

368 Business Building
Smeal College of Business
University Park, PA 16802
United States
814-865-0392 (Phone)
814-865-6284 (Fax)

HOME PAGE: http://www.personal.psu.edu/juy18

The University of Tokyo - Graduate School of Economics ( email )

7-3-1 Hongo
Bunkyo-ku, Tokyo 113-0033
Japan
813-5841-5653 (Phone)
813-5841-5521 (Fax)

Miki Seko

Keio University - Faculty of Economics ( email )

2-15-45 Mita, Ninato-ku
Tokyo 1088345
Japan

Kazuto Sumita

Kanazawa Seiryo University ( email )

Ushi 10-1
Gosho-machi
Kanazawa, Ishikawa 9208620
Japan

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