The option to change the use of a property when future property values and construction costs are uncertain

Åke Gunnelin
Additional contact information
Åke Gunnelin: Section of Building and Real Estate Economics, Royal Institute of Technology, Stockholm, Sweden, Postal: Section of Building and Real Estate Economics, Royal Institute of Technology, Stockholm, Sweden

Managerial and Decision Economics, 2001, vol. 22, issue 7, 345-354

Abstract: This paper models the decision to change the use of a property when its value in the current use and the new use, as well as construction costs, are uncertain. In the case of development of vacant land, when cash flows and construction costs are lognormally distributed, the development of the property optimally takes place when the ratio of benefit to cost of development reaches some fixed level. In the redevelopment case, the timing problem is found to be more complex, as the cost of exercising the conversion option consists of two parts, the construction costs and the surrendered value of the property in the current use, which may evolve differently over time. In this case, optimal redevelopment will take place for different benefit-cost ratios, depending on the relative sizes of the property values in the different uses and the construction costs. Also, for a given current benefit-cost ratio, the option value will vary significantly, depending on the relative size of the state variables. Copyright © 2001 John Wiley & Sons, Ltd.

Date: 2001
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://hdl.handle.net/10.1002/mde.1024 Link to full text; subscription required (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:mgtdec:v:22:y:2001:i:7:p:345-354

DOI: 10.1002/mde.1024

Access Statistics for this article

Managerial and Decision Economics is currently edited by Antony Dnes

More articles in Managerial and Decision Economics from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().