Valuing and Pricing Retail Leases with Renewal and Overage Options |
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Authors: | Hendershott Patric H. Ward Charles W. R. |
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Affiliation: | (1) University of Aberdeen and National Bureau of Economic Research, Aberdeen, UK, AB2Y 3FX;(2) Real Estate and Planning, School of Business Whiteknights, The University of Reading, Reading, UK, RG6 6AH |
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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. |
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Keywords: | retail leases valuation risk neutral discounting risk discount rates |
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