Flexibility and Real Estate Valuation under Uncertainty

Authors’ Preface

What this book is about, and how to use it.

This book is a groundbreaking text for real estate developers and investors. It is about uncertainty: “unknown unknowns.” It shows how the flexibility that exists in real estate investments and development projects unlocks hidden value, and it provides easy‐to‐use tools to quantify that hidden value. If you are a developer or investor, you know that uncertainty pervades your decision‐making, and you intuitively realize the importance of flexibility for dealing with unexpected future outcomes. Flexibility includes such capabilities as the ability to sell a property whenever you choose, to delay a second phase of construction, or to change from building a hotel to building apartments. This book describes an approach to realistically quantifying the nature and effect of future uncertainty, and to putting a monetary value on these types of flexibilities.

Our approach is easy to use because it is based on the industry‐standard spreadsheets of discounted cash flow analysis. It efficiently calculates the values of flexibilities and options, and quantifies the nature of risks and opportunities. In contrast to the complex, highly mathematical procedures that academics and some Wall Street or City “rocket scientists” often use to calculate option value, the approach we present is intuitive, transparent, easy to implement, and, we think, more informative for real estate decision‐makers. The procedures described in this book ...