Valuing and Pricing Retail Leases with Renewal and Overage Options

Patric H. Hendershott, Charles W.R. Ward

NBER Working Paper No. 9214
Issued in September 2002
NBER Program(s):Asset Pricing Program

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.

download in pdf format
   (374 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w9214

Published: Hendershott, Patric H. and Charles W. R. Ward. "Valuing And Pricing Retail Leases With Renewal And Overage Options," Journal of Real Estate Finance and Economics, 2003, v26(2-3,Mar), 223-240. citation courtesy of

Users who downloaded this paper also downloaded* these:
Ambrose, Hendershott, and Klosek w7622 Pricing Upward-Only Adjusting Leases
Bertrand and Kramarz w8211 Does Entry Regulation Hinder Job Creation? Evidence from the French Retail Industry
Grenadier w9475 An Equilibrium Analysis of Real Estate
Stango, Yoong, and Zinman w23057 The Quest for Parsimony in Behavioral Economics: New Methods and Evidence on Three Fronts
Boyarchenko, Lucca, and Veldkamp w22461 Taking Orders and Taking Notes: Dealer Information Sharing in Treasury Markets
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us