Valuing and Pricing Retail Leases with Renewal and Overage Options

Patric Henry Hendershott, C. Ward

    Research output: Contribution to journalArticlepeer-review

    16 Citations (Scopus)


    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.

    Original languageEnglish
    Pages (from-to)223-241
    Number of pages18
    JournalThe Journal of Real Estate Finance and Economics
    Issue number2-3
    Publication statusPublished - 2003


    • retail leases
    • valuation
    • risk neutral discounting
    • risk discount rates


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