The Structure of a Retail Lease

Transcription

1 The Structure of a Retail Lease Authors John D. Benjamin and Peter Chinloy Abstract This paper develops an option-theoretic model of a retail lease. The standard retail lease contains provisions for a security deposit, a base rent, and a percentage rent or a sharing between landlord and tenant of rent revenue above a preset sales threshold or break point level. The findings show that the tradeoff between the security deposit and base rent provisions is independent of percentage rent. The function of the security deposit and percentage rent is to sort separate tails of the distribution of tenants and landlords. Low-quality tenants are charged higher security deposits or are sorted from other tenants by their inability to pay them. High-quality tenants use percentage rent provisions as a method of distinguishing between landlords. Landlords who maintain capital expenditures and who have financial staying power are more likely to collect percentage rent. Introduction This paper develops an option-theoretic model of a retail lease. Retail leases are used widely in shopping centers, malls, and in stand-alone stores. 1 The typical retail lease has three principal monetary provisions: a base rent, a security deposit, and a contingent payment or percentage rent that depends on the tenant s sales above a preset threshold or break point. The option-based model prices the tradeoffs between base rent, security deposit and percentage rent. There are two principal results of our option-theoretic model of a retail lease. First, the tradeoff between the magnitude of the security deposit and base rent is independent of percentage rent. The security deposit is net of payments at the start of a lease including offsets paid by the landlord for tenant improvements. The implication is that an array of different security deposits can be charged, regardless of whether or not percentage rent is also charged. Second, the security deposit and percentage rent combine to sort separate tails of the tenant distribution. The security deposit aids in distinguishing tenant quality. The landlord offers an initial package including tenant improvement allowances and free rent that may be offset by the tenant s security deposit or letter of credit. The payment by the tenant to the landlord for the security deposit less the payment by the landlord on behalf of the tenant for tenant improvements and free rent is JRER Vol. 26 No

2 224 Benjamin and Chinloy the net security deposit. A high net security deposit acts as a quality-sorting device. High-quality tenants receive more concessions from the landlord, while low-quality tenants pay the landlord more in security deposits. Tenant quality is negatively correlated with the net security deposit. Percentage rents accompanied by lower base rents distinguish high-quality landlords. Landlords with staying power, those who eventually make investments in their retail properties, collect percentage rents. These high-quality landlords participate in the rental revenue from successful long-term tenants. The percentage rent provision of the lease, therefore, allows national retail firms to sort between heterogeneous owners of shopping centers. Other researchers have recently analyzed leases and the economics of percentage rent. Wheaton (2000) analyzes percentage rent as a method of sorting between tenants. Successful tenants are those who eventually pay the percentage rent. Mooradian and Yang (2002) view percentage rent as a bonding relationship between landlord and tenant. With that bonding, each party has an incentive to perform. This paper presents another rationale for percentage rents: the percentage rent provision allows for a sorting between landlords. Long-term tenants such as department stores, large anchor tenants, and other national big-box or chain retail stores are able to create incentives for landlords to perform by offering the ultimate payment of percentage rent. Likewise, those landlords willing to invest in their properties and to retain ownership are more likely to receive percentage rent. To further examine the structure of the retail lease, the next section presents a model of the retail lease. Simulations based on the parameter estimates for base rent, security deposit, percentage rent and sales threshold are presented in the following section. The last section contains concluding remarks. A Model of the Retail Lease Under retail leases that contain percentage rent provisions, when the tenant s sales exceed a threshold level or break point the tenant pays the landlord a percentage of the sales as an overage rent. Percentage leases are prevalent in regional malls where more accurate monitoring of sales is possible because national tenants dominate (Colwell and Munneke, 1998). Benjamin, de la Torre and Musumeci (1995) consider the landlord-tenant incentive aspects of leases. In Hendershott and Ward (2003), who note the idiosyncratic nature of the retail lease, the percentage rent is an option held by the landlord on the tenant to obtain a share of sales, and is priced depending on the volatility of sales and term of the lease. The tenant may hold options to extend the lease at the end of the term. 2 Ambrose, Hendershott and Klosek (2002) analyze upward-only added rent as an option. Retail real estate leases provide for base rent plus at least three other types of payments. There are tenant improvements for preparation of the leasing space paid up-front by the landlord, but usually amortized over the lease term. There is a security deposit paid upon inception of the lease and retained on deposit by the

3 The Structure of a Retail Lease 225 landlord. There is a percentage rent provision that provides for a contingent payment to the landlord if the tenant s sales exceed a particular threshold or break point level. This latter provision is relevant where sales can be measured at a specific location, such as for retail tenants located in malls, shopping centers or free-standing properties. The security deposit is retained by the landlord as a reserve and is refunded upon satisfactory completion of the lease including final payment of the base rent. In Asia, it is common for the lease agreement to involve an extensive up-front payment, but a limited or no base rent. For example, in the Korean chonsei, an apartment tenant pays the entire lease payment up-front as a security deposit, but it is refundable on completion of the lease. Percentage leases have been applied to a variety of properties other than retail. In the United States, real estate investment trusts (REITs) hold leases with percentage income rent provisions on golf courses and healthcare facilities. In Europe, it is typical for hotels and healthcare facilities to be leased by operators, allowing for percentage rents. 3 For sales revenue below the base rent, the tenant who ruthlessly defaults may lose the security deposit. For sales revenue between the base rent and the percentage rent threshold, the tenant pays the base rent. For sales above the percentage rent, the tenant pays the base rent plus the percentage rent. The expected rental income of the landlord depends on the lease parameters and the probability distribution of sales revenue. That probability distribution effectively determines tenant quality. In equilibrium, the net security deposit is the base rent less an adjustment for the quality of the tenant. This quality is based on the probability of default and the willingness of the landlord market to trade off between the security deposit and the base rent for that tenant type. The security deposit and base rent tradeoff is independent of the percentage rent. This independence of the percentage rent means that the security deposit prices the risk of a non-credit tenant whether or not a percentage lease clause applies. Inducing the tenant to offer a percentage split with the landlord requires a lower base rent. This tradeoff depends on the base rent, percentage rent and the sales threshold, but not the security deposit. High-quality credit tenants are willing to pay percentage rents to induce performance from landlords. Tenants guard against low-quality landlords by offering incentives that pay off on sales as opposed to accepting higher base rents regardless of performance. The threshold sales level or strike price for percentage payoff on sales is relatively high, usually indicating that only long-term, credit tenants are likely to pay the percentage rent. Exhibit 1 summarizes the landlord s payoff with different levels of sales by the tenant. In the segment on the left, for low sales levels up to the base rent, the landlord collects all of the tenant s sales revenue in the form of rent. Its payoff increases dollar-for-dollar with sales, so the slope of the curve is 1. Once sales reach the base rent, the tenant retains the security deposit, so the landlord s payoff JRER Vol. 26 No

4 226 Benjamin and Chinloy Exhibit 1 Retail Lease with Base and Percentage Rents Landlord Payoff Deposit Slope = Landlord Percentage Base Rent- Security Deposit Sales Threshold Price Slope = 1 declines with a downward jump. The landlord collects only the base rent, so the slope of the curve is 0. When the tenant reaches the threshold sales level or break point for percentage rent, the landlord receives a percentage share of sales. The slope of the curve changes to the landlord s share of the percentage rent. The total rent collected is the sum of the base rent and the percentage rent. In the segment on the left, the tenant behaving ruthlessly may default when sales revenue is less than the base rent. There are, however, several reasons why ruthless default may not occur. First, there is a real option to remain in business that has value even if sales revenue is below the base rent. Second, sales may be serially correlated. If they are mean-reverting, a decline is viewed as temporary. Third, the store location may be unsuccessful but the tenant overall may not be, or the tenant may have other assets. In such cases, the tenant continues paying rent even when it may have vacated the space entirely. When the tenant is not present, the landlord is collecting rent for this phantom space. For smaller retail tenants, phantom space payments are unlikely. For larger retail tenants, phantom space is absorbed either with a new format, subleasing, or lease renegotiation. All of these cases reduce the landlord s potential liability when the default option is potentially in the money, or when sales revenue is below base rent. Exhibit 2 depicts a lease that contains no security deposit and no percentage rent. In this case, the landlord s collection is the total sales up to the base rent, with a slope of 1. At the base rent, the landlord s subsequent payoff is fixed.

5 The Structure of a Retail Lease 227 Exhibit 2 Retail Lease with Fixed Base Rent Landlord Payoff Price Base Rent The baseline no-option retail lease involves a fixed base rent payment with a zero percentage rent and an up-front payment covering only normal wear and tear. For the landlord, the net security deposit is zero. The payoff for the landlord has a slope of 1 up to the fixed base rent and a slope of zero for price outcomes above. In this lease, there is no sorting based on tenant quality. Bad tenants pose risks of slow sales and default, as well as added wear and tear on the property. Good landlords perform expected service and maintenance while remaining financially solvent. At signing for a baseline no-option lease, tenants cannot distinguish between good and bad landlords. Similarly, landlords cannot distinguish between good and bad tenants in Exhibit 2. Thus, the alternative arrangement in Exhibit 1 is a contingent lease where the tenant pays a refundable security deposit and a percentage of sales split based on performance in exchange for a lower base rent. 4 Since the contingent lease reduces the fixed rental payment, the landlord defers recognition of tenant income. As a formal structure, the lease between the tenant and landlord has four principal parameters. First, there is an up-front net security deposit paid by the tenant prior to occupancy. This security deposit can include cash, bank guarantees or letters of credit. From this security deposit, the landlord subtracts payments for tenant improvements, free rent and other lease concessions. The security deposit is retained in total if the tenant is unable to make the rental payment. Upon successful completion of the lease, the security deposit is returned less any deductions for damage. JRER Vol. 26 No

6 228 Benjamin and Chinloy Second, there is a base rent. The base rent includes charges for pass-through operating expenses such as common area maintenance. Third, there is a percentage rent and fourth, a sales threshold level. The percentage rent contingency provides for a split of sales that exceed a predetermined break point. For sales above the break point, the percentage rent is divided as retained by the tenant and (1 ) paid to the landlord. As a representative lease abstract, a non-credit tenant may be asked to pay 12 months rent as a security deposit. If sales exceed double the base amount, or 2, the landlord receives 2% of the overage. The tenant retains the remainder, so its share of the incremental sales is 98%, or The landlord s 10% share is The lease is signed before sales P are known. The tenant s sales in dollars have probability ƒ(p). Sales can range from zero to an extremely large number, but for typical retail stores, sales can be in small dollar amounts. These conditions support and justify sales P having a continuous probability distribution over the range 0 P. The cumulative probability of sales being up to a given level P is F(P). For items where sales are not in small quantities and for large amounts such as appliances and automobiles, a discrete probability distribution may be more appropriate. When sales are below the base rent, the tenant may default ruthlessly. Other tenants continue payment if they hold a real option to continue their business, expect mean-reversion or eventual sales upturns, or have other assets at risk. At some lower level than the base rent, the tenant will eventually default. On a default, the tenant loses the security deposit. If sales are above the base rent but below the threshold for the overage, the tenant pays. The tenant s revenue after paying rent is P. When sales are above the threshold, the tenant has two types of net revenue: revenue from sales below the threshold is ; revenue from overage sales is (P ). Suppose a tenant has a lease providing for an annual payment of $20 a square foot in rent, and occupies a space with 2,000 square feet with no common area maintenance charges. The base rent is therefore $40,000 a year. The security deposit is 3 months of rent, or $10,000. The tenant is projected to achieve retail sales of $100 per square foot per year, or $200,000 as a break point for percentage rent. If sales are above the threshold, the landlord receives 2% of the incremental sales and the tenant the remaining 98%. The sales are unknown, and can range from zero to $1,000,000 annually. If the actual sales are $35,000, the tenant has the prospect of ruthless default, since revenue is below the base rent. If the actual sales are $150,000, the landlord collects the base rent of $40,000. If the actual sales are $400,000, the landlord collects the base rent of $40,000 plus another 2% of $200,000 or $4,000 for a total of $44,000. The payoffs to the tenant Y and the landlord X are:

7 The Structure of a Retail Lease 229 tenant P P Y P P (P ) P (1) landlord P X P (1 )(P ) P In Equation (1), there are three outcomes for the tenant and the landlord. The payoffs to the parties depend on three sales ranges. The first is where sales P are below the base rent or P. Either at this base rent or a lower level (when incorporating the real option to default, any mean-reverting expectations, or the ability to pay on phantom space), the tenant may default. 5 The tenant s revenue is the sales less the net security deposit or P. In this case, the tenant is at risk of losing the security deposit to the landlord. The second sales range P is between the base rent and the percentage rent threshold. Here the tenant pays the base rent only to the landlord, so the landlord s net collection is P. The third is where the tenant s sales are above the threshold. Here the landlord collects the base rent plus a percentage rent (1 )(P ). Using Equation (1) for the landlord s payoffs, the expected return is: X F() [F() F()] (1 F())[ (1 )] (1 )E(PP ). (2) This return has several components. If the tenant defaults ruthlessly, the landlord collects the security deposit with probability F(). If the tenant fails to achieve the sales sufficient to pay percentage rent, the landlord collects the base rent with probability F() F(). If the tenant reaches the break point for percentage rent, the landlord s base rent collection is (1 ) at probability 1 F(). The percentage rent collection is (1 )E(PP ). This is the product of the landlord s share (1 ) and the expected sales, conditional on the sales being above the break point, or E(PP ). The landlord s expected rent depends on the four parameters in the lease: the net security deposit, the base rent, the sales break point and the landlord s percentage rent share. The responses of the expected rent to these four conditions of the lease are: JRER Vol. 26 No

8 230 Benjamin and Chinloy E[X] X F() E[X] X ƒ()( ) (1 F()) E[X] X E[PP ] (1 F()) E[X] X (1 )[E [PP ] ƒ() (1 F())]. (3) From these equilibrium conditions, the tradeoff between the base rent and security deposit is: X ƒ()( ) 1 F() k m()[ ] g(). (4) X F() ƒ() Here m() is the conditional distribution of sales, given that the tenant F() has achieved sales sufficient to pay the base rent. The ratio of those failing to 1 F() attain the base rent to those surviving is g(), g 0. Since the F() landlord split and the percentage rent (, ) do not enter this condition, the security deposit is independent of the percentage rent. Any percentage rent including zero is consistent with a given security deposit. The tradeoff from Equation (4) is therefore applicable to any lease, including those for apartments and offices where sales at a location are not observed and there is no percentage rent. If the market establishes a given tradeoff between the net security deposit and base rent as k, for a given base rent: k g() *. (5) m() The security deposit depends only on the base rent and the distribution of sales. It does not depend on any provisions of the percentage rent (, ). Suppose tenants have distinct distributions, such as between credit and non-credit. For non-credit tenants, the probability of not achieving the base rent F() is

9 The Structure of a Retail Lease 231 higher, lowering the denominator m() and raising the adjustment term. Non-credit tenants must pay a higher security deposit, the amount determined by the sales distribution. A tenant who pays a higher security deposit is not rewarded with a lower contingent share of the percentage rent. Instead, the tradeoff between the security deposit and landlord s percentage rent is: X F(). (6) X E[PP ] (1 F()) The tradeoff is independent of the base rent and security deposit parameters (, ). There may be an array of percentage rent provisions consistent with a given security deposit. A tenant will not agree to surrender part of the sales revenue unless the base rent is reduced. This tradeoff is: X E [PP ] (1 F()). (7) X (1 )[E [PP ] ƒ() (1 F())] The numerator is negative. In the denominator, the first two terms are positive and the third is negative. The first term of the conditional expectation of the payoff increases. The threshold sales must be relatively high compared with the base rent. This assures that the denominator is positive, and with the numerator X negative, thus the tradeoff becomes negative. The implication is that the break X point in the percentage rent is relatively high. These equilibrium conditions with relatively high percentage rent thresholds are consistent with observed leases. The drugstore chains Walgreen s, CVS, Eckerd and Rite-Aid sign leases with percentage clauses. For example, Walgreen s offers 20-year leases with a percentage rent breakpoint of double initial expected sales. Same-store sales growth annually is budgeted at 10% nominally in an environment where inflation ranges between 2% and 4% annually. If the break point is attained, the landlord receives 2.5% of the sales from non-prescription drugs and 0.7% of the sales from prescription drugs. The expected date when percentage rent is payable, therefore, for this Walgreen s example, is seven years. The expected survival date of seven years is in the extreme right tail of the survival distribution of most non-credit tenants. JRER Vol. 26 No

10 232 Benjamin and Chinloy Lease Simulation Analyses The conditions can be applied to determine the structure of a retail lease. The k g() security deposit is * dependent on the tradeoff slope k and the m() base rent. Setting 2.5, the natural logarithm of the base rent is If sales are lognormally distributed, m and g For various values of k, the equilibrium security deposit as a proportion of the base rent is shown in X Exhibit 3. When k is lower in absolute value, the change in profit with X respect to the security deposit is relatively low. With profits concave, this relationship implies that the level of the security deposit is relatively high and thus indicates a more risky tenant. At k 0.2, the equilibrium security deposit is 65% of the base rent. As the slope of the tradeoff shifts to k 0.7, the tenant becomes less risky and the security deposit declines to 4% of the base rent. At some level of tenant quality, the requirement for a security deposit can be as large as the base rent. Such security deposits have been observed for startup firms and others with substantial cash burn rates. For the percentage rent, the landlord receives the fixed payment and its share of the price if the tenant exceeds the threshold. If the base rent is 1, then the increment is a percentage. Suppose the percentage lease provides for a split with 90% of the overage going to the tenant and 10% to the landlord, or 0.9. The break point is 2 or double the existing sales. The security deposit is irrelevant, since it is independent of the percentage rent. This option pricing model uses the Black-Scholes (1973) structure, with the sales ƒ( P) lognormally distributed with a standard deviation of 30%. Tenants will have a term structure to their leases as Exhibit 3 Security Deposit Security Deposit as % of Base Rent Security Deposit-Rent Tradeoff Security Deposit

11 The Structure of a Retail Lease 233 in Grenadier (2001), with lease terms up to ten years. There is a flat term structure of riskless interest rates at 4%. With these parameter conditions, it is possible to derive the percentage rents that the landlord can expect for tenants along the seasoning of leases. That structure is indicated in Exhibit 4. Expressed relative to the base rent, the percentage rent that the landlord can expect is 0.02% for a tenant who has been in the space for one year. For a tenant with five years in the lease, the expected percentage rent is 1.1%. These results support the idea that the percentage rent lease sorts for tenant quality. Over plausible survival ranges of non-credit tenants, the landlord cannot expect to collect much percentage rent. The payoff exceeds 2% of the base rent after eight years, a length of lease term that typically only credit tenants can survive to pay. The percentage rental income is small relative to total income. Increasing the standard deviation to 50%, a ten-year term and a 20% split of sales only increases the landlord s payoff on the percentage rent to 10% of the base. A 20% split of sales on total revenue is not likely to be observed, since that percentage of sales split exceeds the net margins of 10% to 15% typical for most retailers. The consequence is that percentage lease provisions are unlikely to offer landlord splits much in excess of 10%, confirming relatively small payoffs. The long seasoning in the percentage lease payoff indicates that most percentage rent payments will come from credit tenants. In Eppli, Hendershott, Shilling and Mejia (2000) over 90% of the collection of percentage rent comes from seasoned leases on national tenants, principally the anchor department stores. The remaining percentage rent collection arises from the unexpected high performance national firms operating stores that are not anchors. Exhibit 4 Percentage Rent Payment as % of Base Lease Term Percentage Rent JRER Vol. 26 No

12 234 Benjamin and Chinloy Conclusion The baseline no-option retail lease has a base rent and a security deposit. In the absence of percentage rent provisions, the security deposit is a mechanism for landlords to protect against the risk of tenant default. When tenant quality is unobservable, landlords resort to a higher security deposit. Tenants who are unable or unwilling to pay the security deposit select landlords with lower quality standards. For retail leases that have percentage rent provisions with break points, there exists another sorting of tenants. At the high end of the quality spectrum are tenants with contingent rents. These tenants are distinguished by their longevity and revenue splits in the form of percentage rent. In equilibrium, the sales revenue threshold for a percentage rent provision must be relatively high. If this is an option, it is initially deep out of the money. This condition ensures that low-quality tenants are unlikely to pay percentage rent. There are other issues with monitoring percentage rent provisions that may account for their relatively small contribution to total revenue. Sales are difficult to measure and subject to manipulation; or there may be no sales tax policing authority to enforce sales measurement. In these cases, landlords cannot observe and monitor sales. Then it may be appropriate to consider the percentage lease as an initial out of the money call option that rewards successful landlord performance on behalf of the tenant. Tenants find the percentage lease to be less intrusive. This paper highlights the economic tradeoffs between base rent, security deposit and percentage rent provisions. The economic tradeoff between security deposits and base rents are also relevant to leases such as those for office, industrial and apartment properties that do not have percentage rent provisions. Endnotes 1 The International Council of Shopping Centers Dollars and Cents of Shopping Centers: 2002 indicates that, particularly for department store anchor tenants, the landlord must rely on percentage rent to cover costs. The average base rent charged to department store tenants was less than $5 per square foot annually, less than the average cost to the landlord of providing operating services. 2 Hendel and Lizzeri (2002) derive a model of leasing where the tenant has the right to purchase the asset at the term of the lease. There, the application is to automobile leasing. The tenant has the right to purchase the vehicle at the end of the term for a predetermined price, a right they interpret as a strike price of a call option. A minority of car lessees exercise this option, allowing an improved quality in the used car market. The argument is that the secondary market is less dominated by lower-quality lemons. There are analogues in the strike price for the percentage lease exercise. 3 The difference in procedures occurs because of different tax treatments. Financial Accounting Standards Board (FASB) Statements require U.S. firms to account for the

13 The Structure of a Retail Lease 235 entire base rental payment (and most contingent payments) on real estate leases as direct liabilities. European rules typically do not require lease expenses including contingent payments to be reported as a liability, resulting in this procedure being used for hotels, office and industrial properties. The owner leases the entire building to an operator. 4 Differential tax rates create clientele effects that induce contracting. Landlords have an incentive to be structured as pass-through entities such as limited liability companies or S-corporations. Rollover provisions in capital gains taxes create a currency favoring existing landlords over new landlords (Myers, Dill and Bautista (1976), Lewis and Schallheim (1992). Sharpe and Nguyen (1995) indicate that lower tax entities are more likely to lease. Tenant firms lacking the lock-in are at a disadvantage in bidding for assets and prefer to rent. 5 In a real options approach, there is a point below the base rent at which the option value of staying in the business is negative. Between that point and the base rent, the tenant remains in place even if sales are not sufficient to pay the rent. The difference between this point and the base rent depends on variables such as the volatility of sales, length of time to expiration of lease and tenant improvements offered elsewhere. References Ambrose, B., P. H. Hendershott and M. Klosek, Pricing Upward-Only Adjusting Leases, Journal of Real Estate Finance and Economics, 2002, 25, Black, F. and M. Scholes, The Pricing of Options and Corporate Liabilities, Journal of Political Economy, 1973, 81, Benjamin, J., C. de la Torre and J. Musumeci, Controlling the Incentive Problems in Real Estate Leasing, Journal of Real Estate, Finance, and Economics, 1995, 10, Colwell, P. F. and H. Munneke, Percentage Leases and the Advantages of Regional Malls, Journal of Real Estate Research, 1998, 15, Eppli, M., P. H. Hendershott, L. Mejia and J. Shilling, Lease Overage Rent Clauses: Motivation and Use, Paper presented at the 2000 American Real Estate Society Annual Meeting. Grenadier, S., An Equilibrium Analysis of Real Estate Leases, Working paper, Stanford University Graduate School of Business, Hendel, I. and A. Lizzeri, The Role of Leasing Under Adverse Selection, Journal of Political Economy, 2002, 110, Hendershott, P. H and C. W. R. Ward, Valuing and Pricing Retail Leases with Renewal and Overage Options, Journal of Real Estate Finance and Economics, 2003, 26, International Council of Shopping Centers (ICSC), The Dollars and Cents of Shopping Centers: 2002, New York, NY: International Council of Shopping Centers, Lewis, C. and J. Schallheim, Are Debt and Leases Substitutes?, Journal of Financial and Quantitative Analysis, 1992, 27, Mooradian, M. and S. Yang, Commercial Real Estate Leasing, Asymmetric Information, and Monopolistic Competition, Real Estate Economics, 2002, 30, Myers, S., D. Dill and A. Bautista, Valuation of Financial Lease Contracts, Journal of Finance, 1976, 31, Sharpe, S. and H. Nguyen, Capital Market Imperfections and the Incentive to Lease, Journal of Financial Economics, 1995, 39, JRER Vol. 26 No

14 236 Benjamin and Chinloy Wheaton, W. C., Percentage Rent in Retail Leasing: The Alignment of Landlord-Tenant Interests, Real Estate Economics, 2000, 28, The authors thank Peter Colwell, Austin Jaffe, Robert Mooradian, Daniel Quan, Shiawee Yang, and three referees for their careful and constructive comments. Comments by seminar participants at American and Cornell are appreciated. John D. Benjamin, American University, Washington, DC or american.edu. Peter Chinloy, American University, Washington, DC or american.edu.