It is possible conceptually to distinguish two underlying sources of option-based land value over and above the current difference between the value of the best building that could currently be built on the site and the construction cost exclusive of land) of that building, the underlying reasons why it makes sense to wait before immediately commencing a positive-NPV construction:
A) Systematic risk, and idiosyncratic risk.
B) Competing demand for the site, and competing supply of other similar sites.
C) Growth expectations of the value of the evolving highest and best use HBU) for the site, and irreversibility of construction once it is begun building today is mutually exclusive with building tomorrow on the same site.
D) The time value of money, and the risk premium necessary to compensate investors for land value risk.

Question

Quizplus · Accepted Answer

The two underlying sources of option-based land value mentioned are growth expectations of the value of the evolving highest and best use (HBU) for the site, and the irreversibility of construction once it is begun. These factors contribute to the rationale of waiting before commencing construction, as they reflect the potential for the land's value to increase over time and the permanent commitment made once construction starts.

It Is Possible Conceptually to Distinguish Two Underlying Sources of Option-Based