Business Commons^™

Term Default, Balloon Risk, And Credit Risk In Commercial Mortgages, Charles C. Tu, Mark Eppli

Finance Faculty Research and Publications

Term default and balloon risk play an interactive role in the pricing of credit risk in commercial mortgages. Most commercial mortgage pricing studies assume a borrower's default decision is based solely on the property value; the mortgage valuation model here also incorporates a property income trigger. The model considers both the risk of default during the term of the loan and the risk of loss at maturity (balloon risk). Monte Carlo simulation analyses reveal that pricing models based solely on property value overestimate the probability of term default and the resulting credit risk premium. Adding a property income default trigger …

Inter-Center Retail Externalities, Luis C. Mejia, Mark Eppli

Finance Faculty Research and Publications

This paper empirically examines inter-center externalities in regional shopping centers. Specifically, we use a non-linear retail share model to measure the impact that department store size and image in subject and competitive centers have on subject center in-line retail sales. Our findings reveal that department store size and image attributes have a significant and non-linear impact on subject center sales. More importantly, the results show that the effect of department store fashion image dominates that of department store size.

Credit History And The Performance Of Prime And Nonprime Mortgages, Anthony Pennington-Cross

Finance Faculty Research and Publications

Although nonprime lending has experienced steady or even explosive growth over the last decade very little is known about the performance characteristics of these mortgages. Using data from national secondary market institutions, this paper estimates a competing risks proportional hazard model, which includes unobserved heterogeneity. The analysis examines the performance of 30-year fixed rate owner occupied home purchase mortgages from February 1995 to the end of 1999 and compares nonprime and prime loan default and prepayment behavior. Nonprime loans are identified by mortgage interest rates that are substantially higher than the prevailing prime rate. Results indicate that nonprime mortgages differ …

The Effect Of Firm Characteristics On The Use Of Percentage Retail Leases, Gregory H. Chun, Mark Eppli, James D. Shilling

Finance Faculty Research and Publications

Choice of lease payments has been widely studied in the literature. There are three—not necessarily exclusive—explanations that have received attention. The first attributes the choice of fixed versus percentage lease payments to risk-sharing preferences. The second explanation views percentage-of-sales lease agreements as a way discriminating monopolists can appropriate economic rents. The third attributes percentage-of-sales lease agreements to a metering and bonding argument. This paper examines the proposition that the choice of percentage retail leases is driven in part by managements' desire to circumvent the cost of violating debt covenant restrictions. The evidence presented here supports the prediction that retail firms …

Rapid, Low Level Determination Of Silver(I) In Drinking Water By Colorimetric–Solid-Phase Extraction, Matteo P. Arena, Marc D. Porter, James S. Fritz

Finance Faculty Research and Publications

A rapid, highly sensitive two-step procedure for the trace analysis of silver(I) is described. The method is based on: (1) the solid-phase extraction (SPE) of silver(I) from a water sample onto a disk impregnated with a silver-selective colorimetric reagent, and (2) the determination of the amount of complexed analyte extracted by the disk by diffuse reflectance spectroscopy (DRS). This method, called colorimetric–solid-phase extraction (C–SPE), was recently shown effective in determining low concentrations (0.1–5.0 mg/ml) of iodine and iodide in drinking water. This report extends C–SPE to the trace (∼4 μg/l) level monitoring of silver(I) which is a biocide used on …

Credit Rationing In The U.S. Mortgage Market: Evidence From Variation In Fha Market Shares, Brent W. Ambrose, Anthony Pennington-Cross, Anthony M. Yezer

Finance Faculty Research and Publications

This paper examines the nature of mortgage credit rationing across geographic markets and time. Particular attention is paid to the response of conventional mortgage supply to higher risk conditions associated with regional recessions. We develop a series of four indirect tests based on the spatial variation of the FHA share of mortgages, both endorsements and applications, as well as FHA and conventional rejection rates. Results of these four tests indicate that conventional mortgage underwriting criteria do not become more flexible and may even become more demanding when local economic conditions deteriorate. This result indicates the use of non-price credit rationing …

Subprime Lending In The Primary And Secondary Mortgage Market, Anthony Pennington-Cross

Finance Faculty Research and Publications

This article provides an exploratory analysis of the role of subprime lending through an examination of the spatial distribution of Federal Housing Administration (FHA)—eligible home purchase loans in the primary and secondary mortgage markets. Loan originations are aggregated to the metropolitan statistical area level to examine the proportion of the market served by FHA, prime, and subprime lenders. The article then examines whether subprime lenders hold their loans in portfolio or sell them to private conduits.

Primary market results indicate that subprime lenders are more active in cities with worse economic risk characteristics. Secondary market results indicate that although subprime …

Rapid, Specific Determination Of Iodine And Iodide By Combined Solid-Phase Extraction/Diffuse Reflectance Spectroscopy, Matteo Arena, Marc D. Porter, James S. Fritz

Finance Faculty Research and Publications

A new, rapid methodology for trace analysis using solid-phase extraction is described. The two-step methodology is based on the concentration of an analyte onto a membrane disk and on the determination by diffuse reflectance spectroscopy of the amount of analyte extracted on the disk surface. This method, which is adaptable to a wide range of analytes, has been used for monitoring ppm levels of iodine and iodide in spacecraft water. Iodine is used as a biocide in spacecraft water. For these determinations, a water sample is passed through a membrane disk by means of a 10-mL syringe that is attached …

Extension Risk In Commercial Mortgages, Charles C. Tu, Mark Eppli

Finance Faculty Research and Publications

Historical data and Monte Carlo simulation is used to examine the likelihood of loan extension and potential losses associated with extension. It is found that extension probability is highly sensitive to property NOI growth, to NOI volatility, to the amortization schedule, and to the loan term. It is found that extension risk is largely unaffected by changing credit spreads, changing yield curve assumptions, and changing term default assumptions. It is found that changing the underwriting standards affects the probability of loan extension in a somewhat muted way. It is estimated that the loss during extension is approximately 2%-3% of the …

An Empirical Examination Of Traditional Neighborhood Development, Charles C. Tu, Mark Eppli

Finance Faculty Research and Publications

This study analyzes the impact of the new urbanism on single-family home prices. Specifically, we explore the price differential that homebuyers pay for houses in new urbanist developments relative to houses in conventional suburban developments. Using data on over 5,000 single-family home sales from 1994 to 1997 in three different neighborhoods, hedonic regression results reveal that consumers pay more for homes in new urbanist communities than those in conventional suburban developments. Further analyses indicate that the price premium is not attributable to differences in improvement age and other housing characteristics.

A Simulation Analysis Of The Relationship Between Retail Sales And Shopping Center Rents, Gregory H. Chun, Mark Eppli, James D. Shilling

Finance Faculty Research and Publications

This article examines the variation in rents per square foot among regional shopping centers in the United States in response to variation in retail sales per square foot. The analysis breaks new ground by treating base and percentage rents as endogenous functions of retail sales. The analysis further distinguishes between de facto, if not de jure, fixed and percentage leases, and between new versus existing leases. Simulation results suggest that shopping center rents can easily increase in the short-run as retail sales decrease, or they can easily decrease as retail sales increase. In addition, the results suggest that shopping center …

The Structure Of Debt And Active Equity Investors: The Case Of The Buyout Specialist, James F. Cotter, Sarah Peck

Finance Faculty Research and Publications

This paper examines the role buyout specialists play in structuring the debt used to finance the LBO and in monitoring management in the post-LBO firm. We find that when buyout specialists control the majority of the post-LBO equity, the LBO transaction is likely to be financed with less short-term and/or senior debt and less likely to experience financial distress. We also find that buyout specialists have greater board representation on smaller boards, suggesting that they actively monitor managers, and that for these transactions, using debt with tighter terms does not significantly increase the firm's performance. In contrast, in all other …

The Evolution Of Real Estate In The Economy, Dapeng Hu, Anthony Pennington-Cross

Finance Faculty Research and Publications

While the economy as a whole has been rapidly changing in response to technological innovation, real estate has evolved from a depository of wealth for households and assets for corporations into a major force in the debt and equity markets. In contrast, the role of real estate as a contributor to the nation's output and income has remained steady at approximately 11% of gross domestic product.

Local Economic Risk Factors On The Primary And Secondary Mortgage Markets, Brent W. Ambrose, Anthony Pennington-Cross

Finance Faculty Research and Publications

This paper presents a cross-sectional analysis of the spatial distribution of loans in the primary and secondary mortgage markets. Aggregating loan originations to the MSA level, we examine the proportion of the market served by FHA and conventional lenders. We model the geographic differences in market shares as a function of supply, demand, and economic risk factors. Results indicate that FHA market shares are higher in cities with higher economic risk characteristics. To examine the role of GSE activity, we model the spatial distribution of the disposition of conventional loans. Again, we focus on the impact of local economic risk …

The Federal Housing Administration In The New Millennium, Anthony Pennington-Cross, Anthony Yezer

Finance Faculty Research and Publications

The first challenge in attempting to predict the future of the Federal Housing Administration (FHA) is to understand why it is still here. No other depression-era mortgage-market institution has survived without substantial modification. We conclude that its survival has depended on its ability to invent new purposes for itself. For example, it changed from a replacement for failed private mortgage insurance using economic soundness as an insurance criterion to an innovator in high-risk lending based on an acceptable risk criterion. FHA has developed special programs to serve the needs of specific groups. We believe this pattern of change in purposes …

Valuing The New Urbanism: The Case Of Kentlands, Charles C. Tu, Mark Eppli

Finance Faculty Research and Publications

This study assesses the impact of new urbanism on single-family home prices. Specifically, we use Duany and Plater-Zyberk's traditional neighborhood development (TND) of Kentlands and surrounding conventional subdivisions to estimate the premium, if any, that single-family homeowners are willing to pay to reside in a community with new urbanist features. Using data on 2,061 single-family home transactions and several hedonic price models, the empirical evidence reveals that consumers are willing to pay a premium to locate in Kentlands.

What Moves Retail Property Returns At The Metropolitan Level?, Mark Eppli, James D. Shilling, Kerry D. Vandell

Finance Faculty Research and Publications

In this article the determinants of metropolitan-level appraisal-based retail property returns are examined by estimating a six-equation model of retail construction starts, retail sales, stock-market returns, commercial mortgage rates, inflation, and the logarithm of stock-market volatility. Residuals from these equations are then used to explain actual movements in retail real estate returns. Our empirical procedure looks at both unadjusted and unsmoothed appraisal-based retail real estate returns. The general finding is that unsmoothed appraisal-based retail real estate returns lag significantly behind market conditions. Furthermore, the results suggest that very little of the variation in metropolitan-level appraisal-based retail real estate returns can …

The Graaskamp Legacy, Mike Miles, Mark Eppli, Max Kummerow

Finance Faculty Research and Publications

James A. Graaskamp's perspective on classroom education and his alternative research paradigm pioneered or greatly enhanced several real estate principles that are more relevant today than during his life. These principles are summarized and presented in 5 sections: A Different Brand of Research, The Development Feasibility, How Appraisers Value, Who's Watching the Chicken Coop, and Teaching an Ethical Vision.

Value Allocation In Regional Shopping Centers, Mark Eppli

Finance Faculty Research and Publications

Understanding consumer shopping patterns is essential in estimating the value of regional shopping centers. Consumer shopping behavior determines retail sales at regional shopping centers which, in turn, impacts shopping center rents and value. This article quantifies the effects of consumer shopping behavior on nonanchor tenant sales in regional shopping centers. The results of this study reveal that the effects of location, comparison shopping, and department store image are important in estimating shopping center patronage and retail sales. They also indicate that the value of a mall can be allocated to real estate and non-real estate value.

Measuring External Shocks To The City Economy: An Index Of Export Prices And Terms Of Trade, Anthony Pennington-Cross

Finance Faculty Research and Publications

This paper details the construction of an index of export goods prices (the Export Price Index or EPI) for a panel of 196 metropolitan areas from 1977 to 1992. The EPI is an indicator of external demand shocks to the city economy which does not suffer from the causal ambiguity of the endogenous indicators such as income, employment or output. The creation of an index of aggregate export prices, the EPI, for the panel of areas provides both academicians and policy analysts with a new exogenous indicator that identifies demand price innovations and the terms of trade shocks …

A Descriptive Analysis Of The Retail Real Estate Markets At The Metropolitan Level, Mark Eppli, Steven P. Laposa

Finance Faculty Research and Publications

Gross Leasable Area (GLA) per capita is a commonly used measure to compare the retail market potential across different retail real estate markets. This study uses GLA per capita to assess the supply of the retail space across fifty-eight metropolitan areas in the United States. After a detailed descriptive analysis of the supply of retail space, we estimate GLA per capita for each metropolitan area using a modified version of the stock adjustment model. Initial findings indicate that the retail construction boom of the 1980s was not a boom at all and that GLA per capita can be predicted using …

The Influence Of Professional Investors On The Failure Of Management Buyout Attempts, Sarah Peck

Finance Faculty Research and Publications

In a sample of 111 MBO offers between 1984 and 1987, almost 30% attract new blockholders. These blockholders are primarily professional investors who act to facilitate a takeover by a higher bidder, thus increasing returns to both themselves and other public shareholders. In contrast, I find little evidence that pre-existing blockholders, particularly institutional holders, affect either the offer outcome or actively participate in the buyout contest once it begins. The overall pattern of results suggests that professional investors, particularly equity-holding companies, are 'control specialists' who provide valuable services as brokers in the market for corporate control.

How Critical Is A Good Location To A Regional Shopping Center?, Mark Eppli, James D. Shilling

Finance Faculty Research and Publications

The goal of this paper is to empirically measure the consumer utility trade-off between store location (i.e., distance to a shopping center) and retail agglomeration in regional shopping centers. Using the Lakshmanan and Hansen retail expenditure model, our findings reveal that the distance specification is of surprisingly little importance in explaining retail sales. Conversely, agglomeration economies were of significant importance in explaining consumer patronage at regional shopping centers. The implication of these results is that smaller regional shopping centers may be dominated by large super-regional shopping centers with the smaller one or two anchor regional shopping centers unable to compete …

Speed Of Adjustment In Commercial Real Estate Markets, Mark Eppli, James D. Shilling

Finance Faculty Research and Publications

No abstract provided.

A Descriptive Analysis Of U.S. Housing Demand For The 1990s, Mark Eppli, Monty J. Childs

Finance Faculty Research and Publications

We analyze the effect of changes in type of household formation (i.e., single person, single parent, married couple, etc.) on the demand for housing and segment income by household type to determine housing tenure. Using data disaggregated by household type, we forecast housing demand for the United States through the turn ofthe century. The results indicate that total housing demand for the decade will be 11.8 million units, of which 8.1 million will be owner-occupied and 3.7 million will be renter-occupied.

The Evolution Of Shopping Center Research: A Review And Analysis, Mark Eppli, John D. Benjamin

Finance Faculty Research and Publications

Retail research has evolved over the past sixty years. Christaller's early work on central place theory, with its simplistic combination of range and threshold has been advanced to include complex consumer shopping patterns and retailer behavior in agglomerated retail centers. Hotelling's seminal research on competition in a spatial duopoly has been realized in the form of comparison shopping in regional shopping centers. The research that has followed Christaller and Hoteling has been as wide as it has been deep, including literature in geography, economics, finance, marketing, and real estate.

In combination, the many extensions of central place theory and retail …