This is the perfect kind of question for corporate finance students to kick around in Excel, and so as one of the questions for my quantitative corporate finance final, I asked them to help complete this post.

I asked them to make the following assumptions:

The Las Vegas real estate market is now in a severe slump. But imagine that the current and future value of the property, if it is unencumbered by the lease, is $5 million. The convenience store owner is currently making $600 a month as a net profit on the store after all expenses (including $3,500 monthly lease payment to the landlord). To keep the problem simple, assume that there is no inflation, no expected growth in either the tenant profits or in the rental payments, and that the risk-adjusted market interest rate on both the store profit and on the lease payments is an annual interest rate of 6 percent (effective yield, not APR). Finally imagine that the landlord and the store owner have equal bargaining power, in the sense that they will split any gains of trade from cutting a deal.

(Let me be clear, these assumptions are not intended to be realistic. I was trying to craft one question that could be answered in Excel in three hours. I doubt that, even in the best of times, the property was worth $5 million. And in all likelihood, the lease payments may be subject to an escalator clause that increases them overtime.)

You can play too. What’s the bargaining range — the range of dollar amounts that landlord could potentially pay today to bring the parties to the table — for a potential buyout deal? And what percent of $5 million does the landlord need to offer, given his “equal bargaining power” as described above?

In a world with equal bargaining power, who would get the lion’s share of this land bonanza: the landlord, who after all owns the land, or the tenant, who can legally gum up the works for year? Twenty-two years is an awfully long time.

I’ll spare you the Excel spreadsheet, but here is a sketch of an answer. The landlord would need to pay the tenant, at a minimum, about $90,000 — because the present value of the tenant’s expected store profits is about this amount. Even a landlord who could make a take-it-or-leave-it offer would be ill-advised to offer less than this. And at most, the landlord should be willing to pay $3.1 million. Since the present value of the landlord’s expected profit from the lease together with the present value of selling the land when the lease ends is about $1.9 million, the landlord would be loathe to pay a lease buyout fee that would leave her with less net on the table.

A successful buyout raises their combined payouts by about $3 million (from $2 million to $5 million). If they split these gains of trade, then the tenant must be paid her minimum of about $90,000 plus half the gains of trade of about $1.5 million, which is very roughly about one-third of the $5 million.

So in the real world, why didn’t they cut a deal? We’d need to get rid of these hypothetical numbers and know a lot more about the offers and counteroffers. But the sign is, well, a powerful sign that the Coase theorem in this instance did not hold.

By the way, I was back in Las Vegas last week and the sign is still there — although it now says “We have 21 years left on our lease.” A Blackjack lease.