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Capital Structure Decisions in Real Estate Investment


  • George W. Gau
  • Ko Wang


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.

Suggested Citation

  • George W. Gau & Ko Wang, 1990. "Capital Structure Decisions in Real Estate Investment," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 18(4), pages 501-521.
  • Handle: RePEc:bla:reesec:v:18:y:1990:i:4:p:501-521

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    Cited by:

    1. 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.
    2. Winston T.H. Koh & Edward H.K. Ng, 2004. "Investing in Real Estate: Mortgage Financing Practices and Optimal Holding Period," International Real Estate Review, Asian Real Estate Society, vol. 7(1), pages 71-97.
    3. repec:bla:ecaffa:v:37:y:2017:i:1:p:141-145 is not listed on IDEAS
    4. Sjur Westgaard & Amund Eidet & Stein Frydenberg & Thor Christian Grosås, 2008. "Investigating the Capital Structure of UK Real Estate Companies," Journal of Property Research, Taylor & Francis Journals, vol. 25(1), pages 61-87, August.
    5. Seung Dong You, 2014. "The Leveraged City," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 42(4), pages 1042-1066, December.
    6. Hung, Chih-Hsing & Chen, Ming-Chi & Lin, Wen-Yuan, 2014. "The relationship with REITs and bank loans: Capital structure perspectives," Finance Research Letters, Elsevier, vol. 11(2), pages 140-152.
    7. 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.

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