Capitalization of Above Market Financing: Condos and Co-Ops
Journal of Real Estate Research, Vol. 15, No. 2, 1998.
Posted: 27 Apr 1998
Prices and characteristics were collected for two similar, adjacent, buildings. One building, a co-op, has a master mortgage with a prepayment lock-out, while the other building, a condo, has no master mortgage. They provide a natural experiment to isolate the capitalization of financing terms. The research provides the clearest demonstration to date of the impact of financing terms on sales price.
The value of the prepayment lockout is estimated, using a stochastic simulation, as a function of the level of interest rates, rate volatility, and time remaining on the lockout provision. Prices for co-op units are found to fluctuate with the value of the prepayment lockout. The value of the lockout is overcapitalized in the price of co-op units. Co-op status reduces the value of apartments by about 9%.
JEL Classification: G21, R20
Suggested Citation: Suggested Citation