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Shopping Center Financing: Pricing Loan Default Risk

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    Abstract

    The financing structure of a shopping center is decomposed into an income security and two put options. These put options are respectively held by the borrower against the lender for default, and by the lender against an insurer or reinsurer. The prices of the put option depend on the loan-to-value ration of the loan and on the risk of the investment. The interest rate charged on the loan is the sum of four components: a riskless rate, lender production costs, and the net price of the put options. The risk structure of the loan depends on the loan-to-value ratio and the lender production costs. The model has implications for shopping center investors and lenders. For investors, the trade-off between loan-to-value ratio and interest rate is evaluated explicitly, so that an optimal loan contract can be structured. For lenders, a method of pricing a shopping center loan is presented.

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    File URL: http://aux.zicklin.baruch.cuny.edu/jrer/papers/pdf/past/vol09n01/v09p049.pdf
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    Bibliographic Info

    Article provided by American Real Estate Society in its journal Journal of Real Estate Research.

    Volume (Year): 9 (1994)
    Issue (Month): 1 ()
    Pages: 49-64

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    Handle: RePEc:jre:issued:v:9:n:1:1994:p:49-64

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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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    Web page: http://www.aresnet.org/

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    Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
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    Web: http://aux.zicklin.baruch.cuny.edu/jrer/about/get.htm

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    1. Williams, Joseph T, 1993. "Agency and Ownership of Housing," The Journal of Real Estate Finance and Economics, Springer, vol. 7(2), pages 83-97, September.
    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.
    3. Victor Ginsburgh & André De Palma & Yorgo Papageorgiou & Jacques Thisse, 1985. "The principle of Minimum Differentiation Holds under Sufficient Heterogeneity," ULB Institutional Repository 2013/151087, ULB -- Universite Libre de Bruxelles.
    4. Brueckner, Jan K, 1993. "Inter-store Externalities and Space Allocation in Shopping Centers," The Journal of Real Estate Finance and Economics, Springer, vol. 7(1), pages 5-16, July.
    5. McConnell, John J. & Schallheim, James S., 1983. "Valuation of asset leasing contracts," Journal of Financial Economics, Elsevier, vol. 12(2), pages 237-261, August.
    6. Quigley, John M. & Van Order, Robert, 1991. "Defaults on mortgage obligations and capital requirements for U.S. savings institutions : A policy perspective," Journal of Public Economics, Elsevier, vol. 44(3), pages 353-369, April.
    7. C.F. Sirmans & Krisandra A. Guidry, 1993. "The Determinants of Shopping Center Rents," Journal of Real Estate Research, American Real Estate Society, vol. 8(1), pages 107-116.
    8. Eaton, B Curtis & Lipsey, Richard G, 1975. "The Principle of Minimum Differentiation Reconsidered: Some New Developments in the Theory of Spatial Competition," Review of Economic Studies, Wiley Blackwell, vol. 42(1), pages 27-49, January.
    9. Miller, Merton H & Upton, Charles W, 1976. "Leasing, Buying, and the Cost of Capital Services," Journal of Finance, American Finance Association, vol. 31(3), pages 761-86, June.
    10. Mulherin, J Harold & Muller, Walter J, III, 1989. "Resolution of Incentive Conflicts in the Mortgage Industry: A Reply," The Journal of Real Estate Finance and Economics, Springer, vol. 2(1), pages 73-74, February.
    11. Smith, Clifford W, Jr & Wakeman, L MacDonald, 1985. " Determinants of Corporate Leasing Policy," Journal of Finance, American Finance Association, vol. 40(3), pages 895-908, July.
    12. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    13. Ross, Stephen A & Zisler, Randall C, 1991. "Risk and Return in Real Estate," The Journal of Real Estate Finance and Economics, Springer, vol. 4(2), pages 175-90, June.
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