Valuing Real Estate Externality-Based Option in Development of Transit System Projects
Xue Zhou and Ivan D. Damnjanovic, Texas A&M University, March 2010, 37 pp. (169112-1)
Capital-intensive transit projects rely on strong public support and availability of funds. While the general public has become a strong advocate for transit systems, budget shortfalls and financial constraints are still resulting in delays in project delivery. In such business environment, the public sector has an opportunity to partner with the private sector to deliver and operate needed infrastructures. In public-private arrangements, the private sector typically is unwilling to accept the system ridership risk, making such projects financially unfeasible. However, transit projects undoubtedly create value that is not internalized by the developer. The completion of a transit system not only increases the values of properties in the affected area, but also brings incremental tax revenue to the public sector. Thus, some of this newly created value can be shared with the private sector to make the project financially feasible. The objective of this paper is to develop a method for designing externality-based option and a model for its valuation. The proposed valuation model is based on the concept of auctions, where the price-jump results from the introduction of the new transit system. The numerical example results show that externality-based option could reduce private sector risk and add value to the private developer, making transit project more attractive.
Keywords: Externality, Tax-Increment, Real Estate, Contingent Claim Analysis, Pricing
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