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Valuing and Pricing Retail Leases with Renewal and Overage Options

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  • Hendershott, Patric H
  • Ward, Charles W R

Abstract

We consider retail leases with landlord overages options, with tenant renewal options, with both and with neither. We illustrate how the ratio of initial expected sales to the sales threshold can be manipulated to equate the value of the landlord overage options to that of the tenant renewal option at the same initial rent. Not only are the values equal, but the cumulative distributions of potential IRRs on the two leases are nearly identical, suggesting that these leases are equally attractive to risk-averse investors and thus that the same risky discount rate can be used in valuing the leases. In contrast, the appropriate risky discount rate for the overage lease is calculated to be 75-160 basis points greater than that for the renewal lease. Copyright 2003 by Kluwer Academic Publishers

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  • Hendershott, Patric H & Ward, Charles W R, 2003. "Valuing and Pricing Retail Leases with Renewal and Overage Options," The Journal of Real Estate Finance and Economics, Springer, vol. 26(2-3), pages 223-240, March-May.
    • Handle: RePEc:kap:jrefec:v:26:y:2003:i:2-3:p:223-40
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    References listed on IDEAS

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    Cited by:

    1. Jose Lopez, 2009. "Empirical analysis of the average asset correlation for real estate investment trusts," Quantitative Finance, Taylor & Francis Journals, vol. 9(2), pages 217-229.
    2. Neil Crosby & Virginia Gibson & Sandi Murdoch, 2003. "UK Commercial Property Lease Structures: Landlord and Tenant Mismatch," Urban Studies, Urban Studies Journal Limited, vol. 40(8), pages 1487-1516, July.
    3. Joseph Williams, 2014. "Percentage Rents with Agency," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 42(4), pages 791-828, December.
    4. Shaun Bond & Pavlos Loizou & Patrick McAllister, 2008. "Lease Maturity and Initial Rent: Is There a Term Structure for UK Commercial Property Leases?," The Journal of Real Estate Finance and Economics, Springer, vol. 36(4), pages 451-469, May.
    5. Richard Stanton & Nancy Wallace, 2009. "An Empirical Test of a Contingent Claims Lease Valuation Model," Journal of Real Estate Research, American Real Estate Society, vol. 31(1), pages 1-26.
    6. Patric H. Hendershott & Robert J. Hendershott & Charles R. W. Ward, 2003. "Corporate Equity and Commercial Property Market 'Bubbles'," Urban Studies, Urban Studies Journal Limited, vol. 40(5-6), pages 993-1009, May.
    7. Fan, Gang-Zhi & Pu, Ming & Deng, Xiaoying & Ong, Seow Eng, 2018. "Optimal portfolio choices and the determination of housing rents under housing market uncertainty," Journal of Housing Economics, Elsevier, vol. 41(C), pages 200-217.

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    JEL classification:

    • G0 - Financial Economics - - General
    • G3 - Financial Economics - - Corporate Finance and Governance

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