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Capital Structure Decisions in Real Estate Investment

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  • George W. Gau
  • Ko Wang
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Abstract

This study examines the financing decisions of real estate investors and the choice of capital structure when acquiring income-producing properties. Drawing from the literature in finance and real estate, we develop a capital structure model for real estate investment and derive six hypotheses regarding the relationship of the overall loan-to-value ratio chosen by an investor to selected characteristics of the investment. The hypotheses are then tested using financing data from a sample of apartment and commercial transactions over a fifteen-year period in a specific real estate market. The empirical findings strongly support the importance of depreciation deductions, financial distress costs, capital constraints, tax rates, and interest rates as determinants of the capital structure of real estate investors. Copyright American Real Estate and Urban Economics Association.

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Bibliographic Info

Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

Volume (Year): 18 (1990)
Issue (Month): 4 ()
Pages: 501-521

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Handle: RePEc:bla:reesec:v:18:y:1990:i:4:p:501-521

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Cited by:
  1. Cheng, Ping & Lin, Zhenguo & Liu, Yingchun, 2010. "Illiquidity, transaction cost, and optimal holding period for real estate: Theory and application," Journal of Housing Economics, Elsevier, vol. 19(2), pages 109-118, June.
  2. Winston T.H. Koh & Edward H.K. Ng, 2005. "Investing in Real Estate : Mortgage Financing Practices and Optimal Holding Period," Finance Working Papers 22457, East Asian Bureau of Economic Research.

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