A lease option is a clause that grants an option holder the right, but not the obligation, to renew the lease, cancel the agreement, relocate within a property, or even expand to adjacent space. The existence of these options in a leasing agreement:
A) reduces the expected present value of lease cash flows to the owner
B) increases the expected present value of lease cash flows to the owner
C) does not impact the expected present value of lease cash flows to the owner
D) causes the expected present value of lease cash flows to equal zero

Question

Quizplus · Accepted Answer

The presence of lease options increases the uncertainty regarding future cash flows, thus reducing the expected present value of lease cash flows to the owner. This is because there is a possibility that the option holder will exercise their right to cancel the lease or relocate to another part of the property, which would result in a loss of rental income for the owner. Additionally, granting an option to renew the lease at a specific price may result in the owner receiving less rent than market rates at the time of renewal.

A Lease Option Is a Clause That Grants an Option