Which should be the discount rate for a developed economy government tenant that agrees to pay fixed nominal rental income in a commercial lease?

l_t,s: real interest rate
θⁱ_t,s: inflation premium
πⁱ_t,s: uncertainty related to future inflation
ϒⁱ_t,s: credit risk premium
Κⁱ_t,s: commercial real estate risk premium
Φⁱ_t,s: commercial real estate liquidity premium

A. 1 + l_t,s + θⁱ_t,s + πⁱ_t,s + ϒⁱ_t,s + Κⁱ_t,s + Φⁱ_t,s
B. 1 + l_t,s + θⁱ_t,s + πⁱ_t,s + Κⁱ_t,s + Φⁱ_t,s
C. 1 + l_t,s + θⁱ_t,s + πⁱ_t,s

Correct Answer: B

This is analogous to the purchase of a nominal default-free government bond plus the uncertainty relating to the property (risk premium and liquidity premium). The credit risk premium ϒⁱ_t,s should not be included.