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Title: A real option approach to pricing embedded options in retail leases
Authors: Sing, T.F. 
Keywords: Default risks
Option pricing model
Percentage lease agreements (PLAs)
Issue Date: Sep-2012
Citation: 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
ISSN: 14445921
Appears in Collections:Staff Publications

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