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Throwing Good Money After Bad? Cash Infusions and Distressed Real Estate
Author(s) -
Cornell Bradford,
Longstaff Francis A.,
Schwartz Eduardo S.
Publication year - 1996
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/1540-6229.00678
Subject(s) - real estate , cash flow , finance , cash , cash flow forecasting , business , monetary economics , database transaction , operating cash flow , economics , cash management , computer science , programming language
When a leveraged real estate project experience cash‐flow problems, the owner must either inject additional cash or default on the mortgage. We show that it is not optimal for the owner to default as soon as net cash flow becomes negative. Surprisingly, the owner can expropriate some of the mortgage lender's wealth by injecting cash and continuing to pay interest. When the owner has cash constraints, outside investors may be able to extract significant economic rents by financing distressed real estate projects. These results have interesting implications for mortgage lending and the pattern of real estate transaction volume.