Tenant Riskiness, Contract Length, and the Term Structure of Commercial Leases

This paper explores the connection between tenant riskiness, commercial lease length, and the term structure of lease contracts. Theory shows that the possibility of default on a long-term lease generates a risk/lease-length connection. The empirical work uses a large CompStak lease data set combined with tenant characteristics (including risk) from Dun & Bradstreet (D&B). Regressions show that lease length is inversely related to the D&B risk measures, as predicted, and that risky tenants pay a higher rent premium for long-term contracts than low-risk tenants. The presence of such tenants thus raises the slope of the term structure of commercial rents. This paper was accepted by Tomasz Piskorski, finance. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2024.04959 .