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Commercial Loan Underwriting and Option Valuation

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://pages.jh.edu/jrer/papers/pdf/past/vol04n01/v04p001.pdf
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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
Contact details of provider: Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
Web page: http://www.aresnet.org/
Email:

Order Information: Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
Web: http://pages.jh.edu/jrer/about/get.htm Email:


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  1. 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.
  2. 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.
  3. Kaplan, Robert S & Urwitz, Gabriel, 1979. "Statistical Models of Bond Ratings: A Methodological Inquiry," The Journal of Business, University of Chicago Press, vol. 52(2), pages 231-61, April.
  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.
  5. 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.
  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.
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