Financial Leverage, Taxation, and the Maximization of Investment Value

John McDonald

Journal of Real Estate Portfolio Management, 2020, vol. 26, issue 2, 161-169

Abstract: This paper uses a model of value maximization to derive a condition for the optimal amount of financial leverage to maximize the value of equity for a real estate investment entity. Both untaxed entities and taxed entities have a strong incentive to use financial leverage. If investment returns are taxed at a rate that is lower than the rate at which interest payments can be deducted, the value-maximizing scale of investment is larger than in the absence of taxation. The example of a mezzanine loan added to a base loan is included.

Date: 2020
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DOI: 10.1080/10835547.2020.1858006

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