Throwing Good Money after Bad? Cash Infusions and Distressed Real Estate
UCLA Working Paper No 4-94
Posted: 18 Jul 1994
Date Written: January 1994
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: Suggested Citation