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The Cap Rate Spread: A New Metric for Commercial Underwriting
Author(s) -
Seagraves Philip A.,
Wiley Jonathan A.
Publication year - 2015
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 - 10.1111/1540-6229.12100
Subject(s) - underwriting , equity (law) , floating interest rate , loan , business , metric (unit) , econometrics , actuarial science , economics , interest rate , financial economics , finance , marketing , political science , law
This study introduces the cap rate spread as a novel metric for underwriting commercial mortgages. Cap rate spread is the difference between the cap rate and the fixed coupon rate. The spread predicts performance risk in a sample of 24,951 commercial mortgage‐backed securities loans during 1993–2011. We demonstrate that the cap rate spread includes crucial information about performance risk. The results arise from the role of the cap rate spread in generating positive or negative leveraged returns to equity in situations where additional equity is required. Incorporating simplistic cap rate spread requirements in commercial underwriting is expected to reduce loan performance risk.