Highland Properties owns two adjacent four-unit apartment buildings that are both on 20,000 square feet of land near downtown Portland, Oregon. One of the properties is in very good condition, and the apartments can be rented for $ 2,000 per month. The units in the other property require some refurbishing and in their current condition can be rented for only about $ 1,500 per month. Recent zoning changes, combined with changes in market demand, suggest that both lots can be redeveloped. If they are redeveloped, the existing units would be torn down and new luxury apartment building would be built on the site, with ten apartment units. The cost of the ten-unit building is estimated to be about $ 1.5 million, and each of the ten apartment units can be rented for $ 2,500 per month under current market conditions. Similar properties that have been refurbished are selling for ten times their annual rentals.

a. Identify the real option(s) in this example. 

b. What are the basic elements of the option(s), that is, the underlying asset on which the option is based, the expiration date, and the exercise price? 

c. Estimate the value of the option to develop the property. (Make any assumptions you must to arrive at an estimate.)