Commercial Loan Underwriting and Option Valuation

Leon G. Shilton and James R. Webb ()
Additional contact information
Leon G. Shilton: Department of Finance Graduate School of Business Administration Fordham University 113 West 60th Street New York, New York 10023, http://www.fordham.edu/cba/main.asp
James R. Webb: Department of Finance James J. Nance College of Business Administration Cleveland State University Cleveland, Ohio 44115, http://www.csuohio.edu/finance_department/index.htm

Journal of Real Estate Research, 1989, vol. 4, issue 1, 1-12

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.

JEL-codes: L85 (search for similar items in EconPapers)
Date: 1989
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Citations: View citations in EconPapers (2)

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