Flexibility and Real Estate Valuation under Uncertainty

19Decision Rules and Value Implications: We Further Explore the Option to Delay the Project Start

LEARNING OBJECTIVES

• Consider different option implementation rules;
• Learn about trigger values;
• Gain deeper understanding of the value of the project start‐delay option;
• Review the meaning of value gains from flexibility.

OUTLINE OF THE CHAPTER

1. 19.1 Simple Myopic Delay Rule
2. 19.2 Trigger Values
3. 19.3 Value Implications of the Decision Rules
4. 19.4 Effect of Trigger Values (Start or Delay Bias)
5. 19.5 Review the Meaning of Flexibility Value
6. 19.6 Conclusion

We noted in the previous chapter that there are various ways to model the decision of whether and when to implement the option to delay the project start. Our simulation model is a simplified analog of the real world. Developers may have different philosophies, dispositions, objectives, and constraints. Our initial exploration of the start‐delay option was based on what we call our “Aggressive Developer Rule.” This rule leads to very limited triggering of the delay option, although, even so, we saw that it adds significant value to our example Garden City project.

In the present chapter, we explore a different, but arguably equally plausible, delay decision rule. In so doing, we take you deeper into the considerations surrounding the modeling of such decisions, and we see the effects that different decision rules can have. This is not just a technical modeling point—it raises basic management policy considerations. ...