Capitalization of Above Market Financing: Condos and Co-Ops

Journal of Real Estate Research, Vol. 15, No. 2, 1998.

Posted: 27 Apr 1998

See all articles by Austin Kelly

Austin Kelly

Federal Housing Finance Agency (FHFA)

Abstract

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

Kelly, Austin J., Capitalization of Above Market Financing: Condos and Co-Ops. Journal of Real Estate Research, Vol. 15, No. 2, 1998., Available at SSRN: https://ssrn.com/abstract=80548

Austin J. Kelly (Contact Author)

Federal Housing Finance Agency (FHFA) ( email )

1700 G St. NW
Washington, DC 20552
United States
202 414-1336 (Phone)

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