Flexibility and Real Estate Valuation under Uncertainty

13Option Dichotomies: We Introduce a Typology of Flexibility in Development Projects

LEARNING OBJECTIVES

• Understand the difference between defensive and offensive options;
• Understand the difference between Options “on” and “in” the project;
• Understand the difference between Timing and Product options.

OUTLINE OF THE CHAPTER

1. 13.1 Three Dichotomies for Thinking Generally about Development Options
2. 13.2 Defensive versus Offensive Options
3. 13.3 Options “On” and “In” Projects
4. 13.4 Timing Options versus Product Options
5. 13.5 Conclusion

This chapter suggests some ways to think generally about options in real estate development projects. Specifically, we present a three‐way typology to place these options into an overall context.

13.1 Three Dichotomies for Thinking Generally about Development Options

As we noted in Chapter 3, the terms “flexibility” and “option” overlap considerably in the context of this book. Developers have certain types of flexibilities that do not fit the technical economics definition of an “option.” An example is the resale timing flexibility of an existing property we explored quantitatively in Chapter 9. But we can view most of the types of development flexibility that we focus on in this book as options, at least conceptually, pretty much as we defined them in Section 12.1.

At this stage, we introduce three general ways to think about options in development projects. The idea is to help us think about what we can use options for, how we ...