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Recourse as shadow equity: Evidence from commercial real estate loans

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  • David Glancy
  • Robert Kurtzman
  • Lara Loewenstein
  • Joseph Nichols

Abstract

We study the role that recourse plays in the commercial real estate loan contracts of the largest U.S. banks. We find that recourse is valued by lenders as a substitute for conventional equity. At origination, recourse loans have rate spreads that are about 20 basis points lower and loan‐to‐value ratios that are almost 3 percentage points higher than nonrecourse loans. Dynamically, recourse affects loan modification negotiations by providing additional bargaining power to the lender. Recourse loans were half as likely to receive accommodation during the COVID‐19 pandemic, and the modifications that did occur entailed a relatively smaller reduction in payments.

Suggested Citation

  • David Glancy & Robert Kurtzman & Lara Loewenstein & Joseph Nichols, 2023. "Recourse as shadow equity: Evidence from commercial real estate loans," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 51(5), pages 1108-1136, September.
    • Handle: RePEc:bla:reesec:v:51:y:2023:i:5:p:1108-1136
    DOI: 10.1111/1540-6229.12450
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    1. Adelino, Manuel & Gerardi, Kristopher & Willen, Paul S., 2013. "Why don't Lenders renegotiate more home mortgages? Redefaults, self-cures and securitization," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 835-853.
    2. Grovenstein, Robert A. & Harding, John P. & Sirmans, C.F. & Thebpanya, Sansanee & Turnbull, Geoffrey K., 2005. "Commercial mortgage underwriting: How well do lenders manage the risks?," Journal of Housing Economics, Elsevier, vol. 14(4), pages 355-383, December.
    3. Childs, Paul D. & Ott, Steven H. & Riddiough, Timothy J., 1996. "The value of recourse and cross-default clauses in commercial mortgage contracting," Journal of Banking & Finance, Elsevier, vol. 20(3), pages 511-536, April.
    4. Ambrose, Brent W & Sanders, Anthony B, 2003. "Commercial Mortgage-Backed Securities: Prepayment and Default," The Journal of Real Estate Finance and Economics, Springer, vol. 26(2-3), pages 179-196, March-May.
    5. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    6. Lamont Black & John Krainer & Joseph Nichols, 2017. "From Origination to Renegotiation: A Comparison of Portfolio and Securitized Commercial Real Estate Loans," The Journal of Real Estate Finance and Economics, Springer, vol. 55(1), pages 1-31, July.
    7. Andra C. Ghent & Marianna Kudlyak, 2011. "Recourse and Residential Mortgage Default: Evidence from US States 1," The Review of Financial Studies, Society for Financial Studies, vol. 24(9), pages 3139-3186.
    8. David M. Harrison & Thomas G. Noordewier & Abdullah Yavas, 2004. "Do Riskier Borrowers Borrow More?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(3), pages 385-411, September.
    9. Dean Corbae & Erwan Quintin, 2015. "Leverage and the Foreclosure Crisis," Journal of Political Economy, University of Chicago Press, vol. 123(1), pages 1-65.
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    Cited by:

    1. Sumit Agarwal & Brent W. Ambrose & Luis A. Lopez & Xue Xiao, 2024. "Did the Paycheck Protection Program Help Small Businesses? Evidence from Commercial Mortgage-Backed Securities," American Economic Journal: Economic Policy, American Economic Association, vol. 16(3), pages 95-132, August.

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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • R33 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Nonagricultural and Nonresidential Real Estate Markets

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