Serving the Quantitative Finance Community

 
User avatar
tkeller
Topic Author
Posts: 0
Joined: July 26th, 2005, 11:30 pm

How to value revenue share and minimum lease payment

April 17th, 2007, 3:05 pm

I have the following hyothetical situation. I have a retail business and I want to lease it to an opertor. The lease owner will be required to provide an annual payment equal to the greater of :1) X% of the annual gross revenues (the percentage will be negotiated)2) A mimimum lease amount, call it Y (also negotiated), that will be escalated at CPI, for simplicity call it 3%So in year i, I receive the following:If x% of year i revenues > Y*(1.03)^i, x% of revnuesIf x% of year i revenues < Y*(1.03)^i, Y*(1.03)^iSeveral bidders will have the opportunity to bid on this, with each providing two numbers: X, and Y. I have a forecast for revenues and can estimate their volatility. What I need is a methodology to value (determine the NPV) of this stream of cash flows today. I am guessing I need to use some kind of option pricing Much thanks