Purchase option riders

Two forms

A purchase option rider gives the Postal Service the right, but not the obligation, to buy the property — at the end of the base term, after a renewal option, or at another defined point. Riders take one of two forms.

Predetermined price. A fixed dollar figure written into the lease, exercisable within a stated window.

Fair market value. The price is the market value of the property unencumbered by the postal lease, established by independent appraisal, reduced by any prepaid rent and by the unamortized cost of capital improvements the Postal Service has made to the premises.

How the fair-market mechanism resolves

Where an owner disputes the Postal Service’s figure, the standard rider sets out a sequence:

1. The owner has 30 days from the exercise notice to obtain its own appraisal, at its own expense, from an appraiser designated by a recognised national appraisal body.
2. If the two appraisals fall within 10% of one another, the price is the arithmetic average of the two.
3. If they differ by more than 10%, the parties enter a 30-day final negotiation period.
4. Failing agreement, the owner supplies three qualified appraisers and the Postal Service selects one to perform an appraisal review and determine a price. The Postal Service may then — but is not obliged to — purchase at 95% of that figure. The cost of the third appraiser is shared equally.

The asymmetry is worth understanding before relying on the process: the owner funds its own appraisal and half of the third, and the Postal Service retains an option to walk away at the end of it.

Where riders appear

Riders are concentrated in newer vintage stock, broadly properties built from the 1990s onward. Developers of that generation typically amortized construction cost into the base twenty-year lease, which is why rent per square foot on those assets commonly sits above market. The rider was the counterweight to that rent.

What a rider does to value

Renewal rent. Where base rent was set to amortize construction, built-in renewal options are frequently written lower. Even where a renewal carries escalations, the Postal Service may treat the in-place rent as above market and seek to renegotiate at renewal. An owner who underwrote to base-term income can find the asset worth materially less on the other side of it.

Capital appreciation. A predetermined price caps the upside irrespective of what the market does in the intervening years.

When the option gets exercised

Historically the Postal Service has exercised where the purchase price represents a rent multiple of 8× or below. A second trigger is in-place rent significantly below market, where the Postal Service is better served owning than renewing at a corrected rent.

Three recent exercises

The practical point

If a lease carries a purchase option at or below an 8× rent multiple, major capital work is difficult to justify as the notice window approaches. Replacing a roof, a mechanical system or a parking surface in the year before exercise means improving an asset that may shortly transfer at a price which does not reflect the spend.

This note describes the standard rider and observed practice. It is not legal, tax or appraisal advice, and the terms of any individual lease govern. Review your own rider with counsel.