Please use this identifier to cite or link to this item:
|Title:||A real option approach to pricing embedded options in retail leases|
Option pricing model
Percentage lease agreements (PLAs)
|Source:||Sing, T.F. (2012-09). A real option approach to pricing embedded options in retail leases. Pacific Rim Property Research Journal 18 (3) : 197-211. ScholarBank@NUS Repository.|
|Abstract:||Percentage lease agreements (PLAs) contain lease clauses with payments of a flat base rent plus a variable rent, which is pegged to sales turnover. This paper applies a multi-period binomial tree option-pricing model to value default options in PLAs. In the absence of penalties on lease pretermination, tenants have an implicit call option, if exercised, giving them a right to "break" a lease and move to alternative premises at a lower prevailing market rent. Using a hypothetical PLA lease defined by key input parameters, the value of the tenants' default option is estimated at 1.08% for a 3-year PLA lease. When sales turnover and relocation costs are simulated using selected random probability processes, the expected option premiums increase by 0.18% to 1.26%. The levels of base rent and the overage rate are positively related with option premiums. The option premiums, however, decline when relocation costs and sale breakpoint increase.|
|Source Title:||Pacific Rim Property Research Journal|
|Appears in Collections:||Staff Publications|
Show full item record
Files in This Item:
There are no files associated with this item.
checked on Jan 20, 2018
Items in DSpace are protected by copyright, with all rights reserved, unless otherwise indicated.