Are Commercial Mortgage Defaults Affected by Tax Considerations?

40 Pages Posted: 1 Jun 2007

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: December 2006

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, 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. We find an insignificant relation between contemporaneous loan-to-value and default.

Suggested Citation

Cho, Hoon and Ciochetti, Brian A. and Shilling, James D., Are Commercial Mortgage Defaults Affected by Tax Considerations? (December 2006). KAIST College of Business Working Paper Series No. 2007-007, Available at SSRN: https://ssrn.com/abstract=987446 or http://dx.doi.org/10.2139/ssrn.987446

Hoon Cho (Contact Author)

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

87 Hoegiro
Dongdaemun-Gu
Seoul 130-722
Korea
+82-2-958-3413 (Phone)

Brian A. Ciochetti

Independent

James D. Shilling

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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