Managing real options in not-for-profit organizations: The case of shell space

The authors are a finance professor and an administrator in a major suburban independent school district who minored in finance while working toward his doctorate in education. We have used the case of shell space to discover the different incentives non-profit administrators have in the acquisition, recognition, and rational exercise of real options by their organizations (compared with managers of for-profit businesses). Shell space is space within a new building that has been enclosed against the elements, but not yet finished for its intended future use. The shell space can be viewed as a set of complex options (along the lines of the Stulz–Johnson options to choose among a group of several possible finished outcomes with different costs of exercise). A business executive could be expected to make the acquisition decision based on the value drivers know to impact such options. In the not-for-profit arena, though, decisions about the acquisition and use of options are driven by incentives that arise from within the organization or emanate from the politically elected (or appointed) board of trustees.