Shopping Center Financing: Pricing Loan Default Risk

Article OPEN
Peter Chinloy ; James Musumeci (1994)
  • Journal: Journal of Real Estate Research, volume 9, issue 1, pages 49-64
  • Subject:
    • jel: jel:L85

The financing structure of a shopping center is decomposed into an income security and two put options. These put options are respectively held by the borrower against the lender for default, and by the lender against an insurer or reinsurer. The prices of the put option depend on the loan-to-value ration of the loan and on the risk of the investment. The interest rate charged on the loan is the sum of four components: a riskless rate, lender production costs, and the net price of the put options. The risk structure of the loan depends on the loan-to-value ratio and the lender production costs. The model has implications for shopping center investors and lenders. For investors, the trade-off between loan-to-value ratio and interest rate is evaluated explicitly, so that an optimal loan contract can be structured. For lenders, a method of pricing a shopping center loan is presented.
  • Metrics
    views in OpenAIRE
    views in local repository
    downloads in local repository
Share - Bookmark