The Research Of Pricing Commercial Real Estate Lease Contracts With Default Risk

The real estate industry plays an important role in the national economy and hasbecome a pillar industry in China. Commercial real estate investment is very popular inthe world. Most investors put80%of the real estate investment into commercial real estate.The income of commercial real estate investment is mainly from rent. Therefore, theresearch of pricing of commercial real estate lease contracts has a very practicalsignificance for both government and investors.In this paper, there is a default risk in commercial real estate lease contracts. In thiscase, we introduce a reduced form model framework of credit risk to study commercialreal estate lease contracts. Combining the characteristics of commercial real estate leasingassets after default, we consider the re-lease of the lease default in the lease pricing. Thenwe proposal a pricing model with default risk and re-lease. Furthermore, we discuss thedeterministic and stochastic case of re-lease interval. We give the specific forms of thelease model and draw the analytical solutions in both cases. In addition, this paper pointedout that there is bias in solving of the lease model with default risk (A-Y model) presentedby Ambrose and Yildirim (2008). We have come to the amended rental pricing result andthe deviation of the A-Y model rental pricing results through the derivation of thecalculation. Finally, by the estimate of the instantaneous forward rate and some parametersin reference literature (Jarrow and Yildirim(2003), Ambrose and Yildirim (2008),Schirripa(2009)), we use MATLAB to analyze the amended rental pricing results, re-leaserental pricing results and the impact of parameters.The re-lease has a significant impact on rental pricing and rental term structure of thelease contract with default risk. Therefore, ignore of re-leasing issues in commercial realestate lease contracts will bring the deviation of the rental pricing.