Determining the Rental Rate on Commercial Real Estate Leases

Abstract

Although the theoretical framework for determining equilibrium rental rates on commercial land is well-established, applying this framework in practice is difficult because of its dependence on unobservable parameters such as land growth and discount rates. We show how this problem can be overcome by a straightforward application of nonlinear regression methods to actual market transactions involving leased commercial land. This approach avoids the need to invoke ad-hoc parameter values, automatically incorporates any land liquidity premium into rental rates, and ensures that rental, growth, and discount rates are all estimated within a single analytically-consistent framework.