Flexibility and Real Estate Valuation under Uncertainty

18Project Start‐Delay Flexibility: We Model the Value of the Most Basic and Widely Available Development Project Option

LEARNING OBJECTIVES

• Learn how to calculate the value of the flexibility to delay the start of the development project;
• Consider the developer’s delay decision rule;
• Understand the value of option as modeled in a realistic example project.

OUTLINE OF THE CHAPTER

1. 18.1 Project Start‐Delay Option
2. 18.2 Option Exercise Decision Rule
3. 18.3 Defining “Profit” in the Decision Model
4. 18.4 Value of Start‐Delay Flexibility in the Garden City Project
5. 18.5 Conclusion

Now that you have seen how our example development project performs under realistic uncertainty without flexibility, it is time to begin to see the effect that flexibility can have. Remember, the real benchmark for judging the effect of flexibility is not the traditional, single‐stream pro forma, but rather the project recognizing uncertainty but without flexibility. This chapter begins a series of five chapters in which we introduce specific types of flexibilities, one at a time, into the simulation model of the investment performance of the Garden City project under uncertainty that we described in the last chapter.

In this chapter and the next, we will focus on the most basic type of flexibility that exists most widely in development—the flexibility to delay the start of project. We use the results of this analysis to gain intuition about the nature of the value that project start‐delay flexibility ...