Question

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

Answer 1

Answer:

B. Increases the expected present value of lease cash flows to the owner

Explanation:

A lease option gives a right but not the obligation to the renter of the property to buy the said property at today's current market price upon the expiry of lease term.

Lease option is similar to an option contract, the difference being, here instead of securities, leased property serves as the underlying asset and instead of option premium, the renter pays a premium each year in addition to the rental charges.

Lease cash flows refer to the present value of future cash flows which the lessor/owner receives in the form of lease rentals plus the added premium each year.

The more the benefits under lease option clause, the higher the premium charged and thus, more would be the future receipts of owner which would increase the expected present value of lease cash flows to the owner.