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The Leveraged City

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  • Seung Dong You

Abstract

type="main"> This study analyzes the effects of leverage on real estate developments. In urban growth models, a real estate developer converts land from agricultural to urban use. At the time at which such a land conversion occurs, a developer who maximizes the equity value obtains a defaultable construction loan at fair market value. By presenting a more general form of the irreversibility premium of Capozza and Helsley, I show that, with more leverage, uncertainty is less of a deterrent to the land conversion. Under uncertainty, a leveraged developer exercises the land conversion option earlier than an unleveraged developer would. Leverage expands equilibrium city size.

Suggested Citation

  • Seung Dong You, 2014. "The Leveraged City," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 42(4), pages 1042-1066, December.
    • Handle: RePEc:bla:reesec:v:42:y:2014:i:4:p:1042-1066
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