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Underwriting Limits and Optimal Leverage in Commercial Real Estate

The journal of real estate finance and economics, 2020-04, Vol.60 (3), p.375-395 [Peer Reviewed Journal]

Springer Science+Business Media, LLC, part of Springer Nature 2019 ;The Journal of Real Estate Finance and Economics is a copyright of Springer, (2019). All Rights Reserved. ;ISSN: 0895-5638 ;EISSN: 1573-045X ;DOI: 10.1007/s11146-018-09695-4

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  • Title:
    Underwriting Limits and Optimal Leverage in Commercial Real Estate
  • Author: Cremer, Leo
  • Subjects: Cash flow ; Commercial real estate ; Commercial real estate loans ; Economics ; Economics and Finance ; Endogenous ; Financial Services ; Leverage ; Life insurance ; Optimization ; Parameters ; Present value ; Real estate ; Regional/Spatial Science ; Risk management ; Trade ; Underwriting ; Variability
  • Is Part Of: The journal of real estate finance and economics, 2020-04, Vol.60 (3), p.375-395
  • Description: Risk-averse commercial mortgage lenders follow an underwriting policy with strict limits based on the property’s value and cash flow. A borrower then chooses the initial loan amount and amortization that fit into these requirements and maximizes the investment’s net present value. For an underwriting policy based on typical mortgage ratios, this optimization problem has a closed-form solution. Applying the formula to loan business data from life insurance companies, fluctuations in market parameters and cash flow-based policy limits can explain the major part of the observed variability in initial leverage. This analysis gives further support to observations that initial leverage is endogenous to the underwriting process, while cash flow-based and forward-looking measures are of primary importance in commercial loan risk management.
  • Publisher: New York: Springer US
  • Language: English
  • Identifier: ISSN: 0895-5638
    EISSN: 1573-045X
    DOI: 10.1007/s11146-018-09695-4
  • Source: ProQuest Central
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