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Commercial Loan Underwriting and Option Valuation

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Author Info
Leon G. Shilton (Department of Finance Graduate School of Business Administration Fordham University 113 West 60th Street New York, New York 10023)
James R. Webb () (Department of Finance James J. Nance College of Business Administration Cleveland State University Cleveland, Ohio 44115)
Abstract

This article seeks to answer why over a nineteen-year period the debt-coverage ratio for commercial noninsured properties averages 1.29. The article applies the corporate liabilities extension of the Black-Scholes option pricing model to the equity valuation of a real estate project. The regression results of the modified model robustly sustain its usefulness in explaining the derivation of the debt-coverage ratio. The results confirm that commercial mortgage loan underwriters operate with a five-year horizon in creating the equity cushion needed to protect themselves against interest-rate risk.

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File URL: http://aux.zicklin.baruch.cuny.edu/jrer/papers/pdf/past/vol04n01/v04p001.pdf
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Publisher Info
Article provided by American Real Estate Society in its journal Journal of Real Estate Research.

Volume (Year): 4 (1989)
Issue (Month): 1 ()
Pages: 1-12
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Handle: RePEc:jre:issued:v:4:n:1:1989:p:1-12

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Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
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Find related papers by JEL classification:
L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Kaplan, Robert S & Urwitz, Gabriel, 1979. "Statistical Models of Bond Ratings: A Methodological Inquiry," Journal of Business, University of Chicago Press, vol. 52(2), pages 231-61, April. [Downloadable!] (restricted)
  2. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June. [Downloadable!] (restricted)
  3. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1980. " An Analysis of Variable Rate Loan Contracts," Journal of Finance, American Finance Association, vol. 35(2), pages 389-403, May. [Downloadable!] (restricted)
  4. Michael J. Brennan & Eduardo S. Schwartz, 1985. "Determinants of GNMA Mortgage Prices," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(3), pages 209-228. [Downloadable!] (restricted)
  5. James R. Webb & Willard McIntosh, 1986. "Real Estate Investment Acquisition Rules for REITs: A Survey," Journal of Real Estate Research, American Real Estate Society, vol. 1(1), pages 77-98. [Downloadable!]
  6. James F. Epperson & James B. Kau & Donald C. Keenan & Walter J. Muller, 1985. "Pricing Default Risk in Mortgages," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(3), pages 261-272. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Leon G. Shilton & John Teall, 1994. "Option-Based Prediction of Commercial Mortgage Defaults," Journal of Real Estate Research, American Real Estate Society, vol. 9(2), pages 219-236. [Downloadable!]
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