Flexibility and Real Estate Valuation under Uncertainty

23Optimal Phasing: We Now look at Adding Phases, Delineating Phases, and Distinguishing them from Expansion Options

LEARNING OBJECTIVES

• Explore the effect of having more phases, holding overall scale constant;
• Explore the best delineation or sizing of phases;
• Understand principles for optimal phasing;
• Distinguish expansion options from additional phases.

OUTLINE OF THE CHAPTER

1. 23.1 Effect of Increasing the Number of Phases
2. 23.2 Principles for Optimal Phasing
3. 23.3 What Is the Difference between a Phase and an Expansion Option?
4. 23.4 Conclusion

In this last chapter of our exploration of the value of flexibility in real estate development projects, we tie up a few loose ends having to do with project phasing. The overall question is: What is the best way to design and program the phases in a project?

• We begin with a natural follow‐up to Chapter 22. Since it is good to divide the project into two sequential phases, would it be even better to have three phases (holding the overall scale of the project constant)?
• Second, how should we delineate between phases? That is, how much of the project should we put in one phase versus another, especially in the first phase versus later phases?
• Finally, our analysis of phasing begs a broader question—one that relates back to our typology of development flexibility, introduced in Chapters 13–15. What is the difference between a later “phase” versus what we described as an “expansion option”? We shall see that the key is in ...