Working Paper: NBER ID: w9214
Authors: Patric H. Hendershott; Charles W.R. Ward
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. As a result, not only are the values of the dual option overage plus renewal lease and no option leases are equal, but the cumulative distributions of potential IRRs on the two leases are nearly identical, suggesting that these leases are equally attractive to risk-adverse investors and thus that the same risky discount rate can be used in valuing the leases. The analysis is carried out in a risk-neutral framework, and sensitivity of the results to interest rate uncertainty, real sales volatility and growth, and the required risk premium on retail real estate is shown. The appropriate risky discount rate for the overage lease is calculated to be 75 to 160 basis points greater than that for the renewal lease.
Keywords: No keywords provided
JEL Codes: G0; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ratio of initial expected sales to the sales threshold (C24) | value of landlord overage options = value of tenant renewal options (D46) |
| lease structure (R33) | initial rent valuation (R33) |
| presence of options (D79) | investor attractiveness (G24) |
| lease structure (R33) | required return rates (G12) |