Throwing Good Money after Bad? Cash Infusions and Distressed Real Estate

UCLA Working Paper No 4-94

Posted: 18 Jul 1994

See all articles by Bradford Cornell

Bradford Cornell

Anderson Graduate School of Management, UCLA

Francis A. Longstaff

University of California, Los Angeles (UCLA) - Finance Area

Eduardo S. Schwartz

University of California, Los Angeles (UCLA) - Finance Area; Simon Fraser University (SFU); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: January 1994

Abstract

When a leveraged real estate project experiences 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.

JEL Classification: G21

Suggested Citation

Cornell, Bradford and Longstaff, Francis A. and Schwartz, Eduardo S. and Schwartz, Eduardo S., Throwing Good Money after Bad? Cash Infusions and Distressed Real Estate (January 1994 ). UCLA Working Paper No 4-94, Available at SSRN: https://ssrn.com/abstract=5420

Bradford Cornell (Contact Author)

Anderson Graduate School of Management, UCLA ( email )

Pasadena, CA 91125
United States
626 833-9978 (Phone)

Francis A. Longstaff

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-2218 (Phone)
310-206-5455 (Fax)

Eduardo S. Schwartz

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-1953 (Phone)
310-206-5455 (Fax)

Simon Fraser University (SFU) ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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