Are Commercial Mortgage Defaults Affected by Tax Considerations?

Posted: 20 Dec 2012

See all articles by Hoon Cho

Hoon Cho

Korea Advanced Institute of Science and Technology (KAIST)

Brian A. Ciochetti

Independent

James D. Shilling

DePaul University; National Bureau of Economic Research (NBER)

Date Written: 2012

Abstract

We study whether tax considerations are an important determinant of commercial mortgage default. We also study whether large lenders are better informed, or better at interpreting information for lending purposes, and hence have lower foreclosure rates; whether lenders have more information on larger borrowers than smaller borrowers, and hence have lower foreclosure rates on larger loans; and whether commercial mortgage defaults are related to debt service coverage and loan-to-values, both initial and contemporaneous. The paper's main findings are fourfold. First, holding all else equal, there is evidence that tax considerations influence investors' decisions about when to "put" assets to lenders. The results are consistent with the argument of Constantinides (1984). Second, the evidence suggests that large lenders are especially knowledgeable about commercial mortgage borrowers and commercial property markets, in that they have lower foreclosure rates than smaller lenders. Third, on the question of whether lenders have more information on larger borrowers than smaller borrowers, we find that larger loans have, on average, lower default rates than smaller loans. Fourth, the findings suggest that lower default rates are associated with higher debt service coverage ratios, both initial and contemporaneous.

Keywords: default, commercial mortgages, taxes

Suggested Citation

Cho, Hoon and Ciochetti, Brian A. and Shilling, James D., Are Commercial Mortgage Defaults Affected by Tax Considerations? (2012). Journal of Real Estate Finance and Economics, Vol. 46, No. 1, 2013, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2191648

Hoon Cho

Korea Advanced Institute of Science and Technology (KAIST) ( email )

373-1 Kusong-dong
Yuson-gu
Taejon 305-701, 130-722
Korea, Republic of (South Korea)

Brian A. Ciochetti

Independent

James D. Shilling (Contact Author)

DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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