Valuing and Pricing Retail Leases with Renewal and Overage Options

Patric Hendershott and Charles Ward

The Journal of Real Estate Finance and Economics, 2003, vol. 26, issue 2-3, 223-40

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

Date: 2003
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