Optimal Capital Structure in Real Estate Investment: A Real Options Approach

This article employs a real options approach to investigate the determinants of an optimal capital structure in real estate investment. An investor has the option to delay the purchase of an income-producing property because the investor incurs sunk transaction costs and receives stochastic rental income. At the date of purchase, the investor also chooses a loan-to-value ratio, which balances the tax shield benefit against the cost of debt financing resulting from a higher borrowing rate and a lower rental income. An increase in the sunk cost or the risk of investment will not affect the financing decision, but will delay investment. An increase in the income tax rate or a decrease in the depreciation allowance will encourage borrowing and delay investment, while an increase in the penalty from borrowing, a decrease in the investor's required rate of return, or worse real estate performance through borrowing, will discourage borrowing and delay investment.Optimal Capital Structure; Real Estate Investment; Real Options; Transaction Costs

Environment, irreversibility and optimal effluent standards

The present article investigates the use of performance standards to correct environmental externalities. Each firm in an industry emits waste in the production process, and, in turn, the average waste emissions of the industry adversely affect the firm's productivity. The firm, which incurs sunk costs when employing capital to abate waste emissions, is uncertain about the efficiency of capital. The firm will underestimate environmental externalities and will therefore pollute more than is socially efficient. To correct this tendency, the regulator can set a limit on either emissions or the emission‐output ratio at the socially efficient level. The firm will invest more, produce more, and pollute less when the regulator implements the former than when the regulator implements the latter.Environmental Economics and Policy,

The Impacts of Fees and Taxes on Choices of Development Timing and Capital Intensity

This article compares the effects of various fiscal policies on choices of development timing and capital intensity when rents on housing follow geometric Brownian motion with those when rents follow arithmetic Brownian motion. These policy instruments include fees on capital, housing, and land, and taxes on urban income, and properties both before and after development. Regardless of the motion of rents, when one choice is fixed, the effects of these policy instruments on the other choice are qualitatively the same. When the two choices are determined endogenously, although these policy instruments exhibit the same qualitative effect on the choice of development timing, they may exhibit different effects on the choice of capital intensity if rents on housing follow different types of motions.Capital intensity, Development Timing, Fees, Taxation, Real Options, International Development, G13, H21, H23, R52,

Externality and Optimal Property Taxation: Application of the Real Options Model to Real Estate Investment (外部性與最適財產稅-實質選擇權模型在不動產投資的應用)

This article investigates the design of property taxation both before and after development in a real options framework where a fixed number of landowners irreversibly develop property in an uncertain environment. We assume that densely developed properties reduce open space, and thereby harm urban residents. However, landowners will ignore this negative externality, and will thus develop properties more densely than is socially optimal. The regulator can correct this tendency by imposing taxation on property both before and after development. It is, however, unclear whether the latter should be taxed at a higher rate than the former even though the negative externality arises only after the property is developed

Do Tighter Restrictions on Density Retard Development?

Williams (1991) builds a real-options model to investigate the timing and the scale decisions of property development. Williams asserts that tighter restrictions on density retard development. This article finds that there are some typos in Williams’s article such that his assertion does not hold in general. In particular, his assertion will not hold as long as the density restrictions are not set too low relative to the density level that would be chosen by landowners in the absence of any regulation

Corporate Borrowing and Growth Option Value: The Limited Liability Effect

A firm issues bonds before undertaking a risky continuous investment project that is costly to later either expand or contract. The firm's existing debt load causes it to install a smaller capacity because equity has limited liability. This lowers debt value, but such a cost should be borne by equityholders because debtholders will rationally anticipate equityholders' future behavior. The firm's choice of debt levels balances this agency cost against the tax shield benefit. As the firm incurs higher costs to later expand capacity, its growth option value becomes lower. The simulation results of this article are in line with Myers' conjecture (1977), which states that a firm's debt capacity is inversely related to its growth option value

R&D Investment Decision and Optimal Subsidy

This article assumes that a firm facing technological uncertainty must decide whether to purchase R&D capital at each instant. R&D capital exhibits both irreversibility and externality through the learning‐by‐doing effect. The combination of irreversibility and uncertainty drives agents to be more prudent; the maxim `better safe than sorry' applies. This maxim is more important if uncertainty is greater, technology progresses at a lower pace, the externality is stronger, or a catastrophic event is less likely to occur. A firm ignoring the externality will both invest later and disinvest earlier than a social planner who internalizes the externality. An equal rate of investment tax credits should be given to both costlessly reversible investments and irreversible ones, and the same rate of taxation should be imposed on disinvestment

Entry, Financing, and Bankruptcy Decisions: The Limited Liability Effect

A firm, which has a privileged right to undertake an irreversible investment project, simultaneously determines whether to exercise this project and also how many bonds to issue in the presence of demand uncertainty. The firm will not exercise the project until its net value from investing immediately equals its option value from delaying investment. The firm’s choice of debt levels balances the tax advantage of debt against a cost associated with the event of bankruptcy. The effects of uncertainty, asset specificity, and the costs to purchase capital later on a firm’s entry, financing, and bankruptcy decisions are examined and compared with those in the literature. © 2001 Bureau of Economic and Business Research, University of Illinois. All rights reserved