Lease Option Premium Calculator

Lease options carry quantifiable value that should be priced into rent.

Option term years

Current monthly rent

Projected future rent

Strike rent / mo

Exercise probability %

Option premium per month

$2,600

Total option value

$156,000

Intrinsic spread per mo

$4,000

How the math works

Intrinsic = projected − strike. Total = intrinsic × 12 × years × exercise %. Premium = total ÷ (12 × years).

$32k − $28k = $4k/mo intrinsic × 60 mo × 65% = $156k total value, $2.6k/mo priced premium.

How to Use

Enter option term length years.
Enter projected future rent / current rent.
Enter strike rent.
Enter probability of exercise %.
Read option premium per month.

Frequently Asked Questions

What's a lease option?

A lease option gives tenant the right (not obligation) to extend the lease or purchase the property at predetermined terms. Common types: (1) renewal option at fair market rent (low value), (2) renewal option at fixed/capped rent (high value if market rises), (3) purchase option at fixed price (can be very high value). Landlord gives up upside for tenant stability. The option has real economic value that should be priced into initial rent.

How do you value a lease option?

Use option-pricing intuition: option value increases with (1) volatility of market rent, (2) spread between strike and forward market, (3) time to exercise, (4) probability of exercise. A 5-year renewal option at 90% of current rent during a rising market is worth 8-15% of current rent as a prepaid premium. In a flat market, same option worth 1-3%. Institutional operators run Black-Scholes-style models for material options.

How does the landlord get paid for this?

Rent premium (higher initial rent in exchange for granting option). Fixed exercise fee (tenant pays $X to exercise). Non-refundable option consideration at signing. Rent step-up at exercise (FMV or predetermined %). Rent recapture clauses. Most commonly, landlords price the option as part of negotiated initial rent but don't explicitly line-item it — which means they often under-price in tenant-friendly markets.

When does tenant exercise?

Tenant exercises when (1) market rent has risen faster than strike, (2) relocation cost is high (build-out, permits, moving, CapEx), (3) customer/supplier proximity matters. Retail tenants almost always exercise if business is healthy — relocation is expensive. Office tenants exercise 50-70% in typical markets, higher in compressed downtown cores. Industrial: 75%+ exercise rate, high fit-out makes moves expensive.