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Capital Structure Decisions in Real Estate Investment

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  • George W. Gau
  • Ko Wang

Abstract

This study examines the financing decisions of real estate investors and the choice of capital structure when acquiring income‐producing properties. Drawing from the literature in finance and real estate, we develop a capital structure model for real estate investment and derive six hypotheses regarding the relationship of the overall loan‐to‐value ratio chosen by an investor to selected characteristics of the investment. The hypotheses are then tested using financing data from a sample of apartment and commercial transactions over a fifteen‐year period in a specific real estate market. The empirical findings strongly support the importance of depreciation deductions, financial distress costs, capital constraints, tax rates, and interest rates as determinants of the capital structure of real estate investors.

Suggested Citation

  • George W. Gau & Ko Wang, 1990. "Capital Structure Decisions in Real Estate Investment," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 18(4), pages 501-521, December.
    • Handle: RePEc:bla:reesec:v:18:y:1990:i:4:p:501-521
    DOI: 10.1111/1540-6229.00534
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    Cited by:

    1. Winston T.H. Koh & Edward H.K. Ng, 2004. "Investing in Real Estate: Mortgage Financing Practices and Optimal Holding Period," International Real Estate Review, Global Social Science Institute, vol. 7(1), pages 71-97.
    2. Adam Baldwin, 2017. "New Developments in Real Estate Financing," Economic Affairs, Wiley Blackwell, vol. 37(1), pages 141-145, February.
    3. Seung Dong You, 2014. "The Leveraged City," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 42(4), pages 1042-1066, December.
    4. Jianfu Shen & Kwong Wing Chau, 2022. "The Effect of Access to the Public Debt Market on Corporate Financing Decisions: The Case of REITs," Sustainability, MDPI, vol. 14(13), pages 1-19, June.
    5. Sjur Westgaard & Amund Eidet & Stein Frydenberg & Thor Christian Grosås, 2008. "Investigating the Capital Structure of UK Real Estate Companies," Journal of Property Research, Taylor & Francis Journals, vol. 25(1), pages 61-87, August.
    6. Hung, Chih-Hsing & Chen, Ming-Chi & Lin, Wen-Yuan, 2014. "The relationship with REITs and bank loans: Capital structure perspectives," Finance Research Letters, Elsevier, vol. 11(2), pages 140-152.
    7. Cheng, Ping & Lin, Zhenguo & Liu, Yingchun, 2010. "Illiquidity, transaction cost, and optimal holding period for real estate: Theory and application," Journal of Housing Economics, Elsevier, vol. 19(2), pages 109-118, June.
    8. Leo Cremer, 2020. "Underwriting Limits and Optimal Leverage in Commercial Real Estate," The Journal of Real Estate Finance and Economics, Springer, vol. 60(3), pages 375-395, April.

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