Valuation of Flexible Leases for Corporate Tenants Facing Uncertainty in Their Required Workspace

• Authors: Baabak Ashuri

Title variants

LT

Lanksčiosios nuomos komerciniams nuomininkams vertinimas, esant netikrumui dėl reikiamo darbo ploto

Abstracts

EN

A valuation approach is presented to price flexible leases with expansion, contraction, and/or cancelation options from the corporate tenant perspective. This model uses the real option valuation approach and determines the flexibility value or the option premium of a lease. This premium is the maximum amount of money that the tenant is willing to invest in incorporating a specific flexible feature in the leasing arrangement. Our model considers uncertainty in the rental market, as well as uncertainty about the firm's required workspace in an integrated valuation framework.

LT

Pristatomas vertinimo metodas, kaip iš komercinio nuomininko perspektyvos įkainoti lanksčiąją nuomą su galimybe didinti arba mažinti plotą ir (arba) atsisakyti nuomos. Šiame modelyje, taikant realių pasirinkimo sandorių vertinimo metodą, nustatoma nuomos lankstumo vertė arba priemoka už galimybę rinktis. Ši priemoka - tai maksimali pinigų suma, kurią nuomininkas pasiruošęs investuoti, idant į nuomos susitarimą galėtų įtraukti konkretų punktą dėl lankstumo. Mūsų modelyje į nuomos rinkos netikrumą ir į netikrumą dėl įmonei reikiamo darbo ploto atsižvelgiama taikant kompleksinę vertinimo sistemą.

Keywords

EN

Real options analysis; Pricing flexible leases; Uncertainty about the required workspace; Dynamic uncertainty of leasing market; Financial risk analysis

• Publisher: Sciendo
• Journal: International Journal of Strategic Property Management
• Year: 2010
• Volume: 14
• Issue: 1
• Pages: 49-72

Contributors

author

Baabak Ashuri

• Economics of the Sustainable Built Environment (ESBE) Lab, School of Building Construction, Georgia Institute of Technology, 280 Ferst Drive, 1st Floor, Atlanta, GA 30332-0680, USA

References

• Amram, M. and Kulatilaka, N. (1999)Real Options: Managing Strategic Investment in an Uncertain World, Harvard Business School Press.
• Ashuri, B. (2008) A Real Options Approach to Modeling Investments in Competitive, Dynamic Retail Markets. Georgia Institute of Technology, Atlanta, GA.
• Ashuri, B. and Roper, K.O. (2006) Workspace decision-making in the era of transformation.Proceedings of 2006 International Conference on Construction & Real Estate Management, Orlando, FL. October 5-6, 2006.
• Ashuri, B. and Rouse, W. B. (2004) Framing strategic trade offs between traditional and virtual enterprises and workplace.Proceedings of International Federation of Automation Control (IFAC) Conference, Atlanta, GA. September 7-9, 2004.
• Ashuri, B., Rouse, W. B. and Bodner, D. A. (2008) A real options approach to investment decisions in competitive, dynamic retail markets.2008 Hawaii International Conference on System Sciences (HICSS-41), Waikoloa, Big Island, HI. January 7-10, 2008, pp. 93-106.
• Becker, F. (1999) Beyond alternative officing: Infrastructure on-demand,Journal of Corporate Real Estate, 1(2), pp. 154-166.
• Becker, F. and Sims, W. (2000) Managing Uncertainty Integrated Portfolio Strategies for Dynamic Organizations. The International Workplace Studies Program, College of Human Ecology, Cornell University.
• Becker, F. and Steele, F. (2000) Alternative Officing Strategies Providing Effective Workspaces. Steelcase Inc. doi:10.1108/14630019910811006
• Bengtsson, J. (2001) Manufacturing flexibility and real options: A review,International Journal of Production Economics, 74(1), pp. 213-224. doi:10.1016/S0925-5273(01)00128-1
• Black, F. and Scholes, M. (1973) The pricing of options and corporate liabilities,Journal of Political Economy, 81(3), pp. 637-654. doi:10.1086/260062
• Bodner, D. A. and Rouse, W. B. (2007) Understanding R&D value creation with organizational simulation,Systems Engineering, 10(1), pp. 64-82. doi:10.1002/sys.20064
• Borison, A. (2005) Real options analysis: Where are the emperor's clothes?,Journal of Applied Corporate Finance, 17(2), pp. 17-31. doi:10.1111/j.1745-6622.2005.00029.x
• Brealey, R. and Myers, S. (2003)Principles of Corporate Finance, 7th Edition, McGraw-Hill, New York.
• Brenner S., Schulz R. and Härdle W. (2008) Real options and real estate valuation: an implementation study (in German), forthcoming: Zeitschrift für betriebswirtschaftliche Forschung.
• Capozza, D. R. and Li, Y. (2002) Optimal land development decisions,Journal of Urban Economics, 51(1), pp. 123-142. doi:10.1006/juec.2001.2240
• Chiara, N., Garvin, M. and Vecer, J. (2007) Valuing simple multiple-exercise real options in infrastructure projects,Journal of Infrastructure Systems, 13(2), pp. 97-104. doi:10.1061/(ASCE)1076-0342(2007)13:2(97)
• Copeland, T. and Antikarov, V. (2001)Real Options: A Practitioner's Guide, TEXERE, New York.
• Davenport, T.H. and Pearlson, K. (1988) Two cheers for the virtual office,Sloan Management Review, 39(4), pp. 51-66.
• de Neufville, R., Lee, Y.S. and Scholtes, S. (2008) Flexibility in Hospital Infrastructure Design.IEEE Conference on Infrastructure Systems, Rotterdam, November 8-10, 2008.
• Dixit, A. and Pindyck, R. (1994)Investment under Uncertainty, Princeton University Press, Princeton, NJ.
• Ford, D.N., Lander, D.M. and Voyer, J.J. (2002) A real options approach to valuing strategic flexibility in uncertain construction projects,Construction Management and Economics, 20(4), pp. 343-351. doi:10.1080/01446190210125572
• French, N., Evans, M. and Atherton, E. (2000) Behaviour: flexibility: pricing the uncertainty (an analysis of the pricing of leases with flexible lease terms). In:The 2000 RICS Cutting Edge Conference, London, UK. September 6-8, 2000.
• Geltner, D. (1989) On the use of the financial option price model to value and explain vacant urban land,AREUEA Journal, 17(2), pp. 142-158.
• Geltner, D., Riddiough, T.J. and Stojanovic, S. (1996) Insights on the effect of land use choice: The perpetual option on the best of two underlying assets,Journal of Urban Economics, 39, pp. 20-50. doi:10.1006/juec.1996.0002
• Greden, L. and Glicksman, L. (2005) A real options model for valuing flexible space,Journal of Corporate Real Estate, 7(1), pp. 34-48. doi:10.1108/14630010510812486
• Greden, L.V., Glicksman, L.R. and Lopez-Betanzos, G. (2006) A real options methodology for evaluating risk and opportunity of natural ventilation,Journal of Solar Energy Engineering, 128(2), pp. 204-212. doi:10.1115/1.2188959
• Grenadier, S.R. (1995) Valuing lease contracts a real-options approach,Journal of Financial Economics, 38(3), pp. 297-331. doi:10.1016/0304-405X(94)00820-Q
• Hull, J.C. (2008)Options, Futures, and Other Derivatives, 7th Edition, Prentice Hall Series in Finance, Upper Saddle River, New Jersey.
• Hutchison, N. and Schulz, R. (2007) A real options approach to development land valuation. RICS Research FiBRE September, London.
• IFMA (1995) Alternative Officing Research and Workplace Strategies. Haworth Inc. in Collaboration with the International Facility Management Association (IFMA) Foundation, Houston, TX.
• Leung, B. Y. P. and Hui, E. C. M. (2000) Real options pricing for property development,International Journal of Strategic Property Management, 4(1), pp. 5-22.
• Leung, B. Y. P. and Hui, E. C. M. (2002) Option pricing for real estate development: Hong Kong Disneyland,Journal of Property Investment & Finance, 20(6), pp. 473-495. doi:10.1108/14635780210446487
• Leung, B. Y. P. and Hui, E. C. M. (2005) Evaluation approach on Public-Private Partnership (PPP) urban redevelopment,International Journal of Strategic Property Management, 9(1), pp. 1-16.
• Lizieri, C., Crosby, N., Gibson, V. and Thorpe, D. (1997)Right Space, Right Price?: A Study of the Impact of Changing Business Patterns on the Property Market, Research Report, The Royal Institution of Chartered Surveyors (RICS), London, UK.
• Luenberger, D. (1998)Investment Science, Oxford University Press, New York.
• Lyne, J. (1995) The info-age workplace: now at a location surrounding you, Site Selection, Document #4206, August 1995.
• Mayer, Z. and Kazakidis, V. (2007) Decision making in flexible mine production system design using real options,Journal of Construction Engineering and Management-ASCE, 133(2), pp. 169-180. doi:10.1061/(ASCE)0733-9364(2007)133:2(169)
• Mun, J. (2003)Real Options Analysis Course: Business Cases and Software Applications, John Wiley & Sons, New York.
• Myers, S.C. (1977) Determinants of corporate borrowing,Journal of Financial Economics, 5, pp. 147-175. doi:10.1016/0304-405X(77)90015-0
• Patel, K. and Paxson, D. (2001) Real urban development options at Canary Wharf. In:Real Options: Evaluating corporate investment opportunities in a dynamic world, Financial Times/Prentice Hall, London, UK, pp. 163-176.
• Patel, K., Paxson, D. and Sing, T.F. (2005) A review of the practical uses of real property options.RICS Research paper series, 5:1(April).
• Shishko, R., Ebbeler, D.H. and Fox, G. (2004) NASA technology assessment using real options valuation,Systems Engineering, 7(1), pp. 1-13. doi:10.1002/sys.10052
• Smit, H. and Trigeorgis, L. (2004)Strategic Investment: Real Options and Games, Princeton University Press.
• Titman, S. (1985) Urban land prices under uncertainty,American Economic Review, 75(3), pp. 505-514.
• Trigeorgis, L. (1996)Real Options: managerial flexibility and strategy in resource allocation, The MIT Press, Cambridge, Massachusetts.

Identifiers

DOI

10.3846/ijspm.2010.05