How has Real Estate Financing Changed Over Time?
Historically, income-producing commercial real estate often was financed with high levels of debt. Properties provided tangible security for mortgage financing, and the rental income from those properties was a clear source of revenue to pay the interest expense on the loan. Property markets often were dominated by developers or entrepreneurial businessmen who were attempting to build personal fortunes and who were willing to take on huge risks to do so. Prior to the real estate recession of the early 1990s, it was not uncommon for individual properties to carry mortgages that represented over 90 percent of the properties’ estimated market value or cost of construction. Occasionally, loan-to-value ratios went even higher. The severe real estate recession of the early 1990s forced many real estate lenders, developers and owners to reconsider the appropriate use of debt financing on real estate projects. Today, properties owned by REITs are financed on a much more conservative basis. On
Historically, income-producing commercial real estate often was financed with high levels of debt. Properties provided tangible security for mortgage financing, and the rental income from those properties was a clear source of revenue to pay the interest expense on the loan. Property markets often were dominated by developers or entrepreneurial businessmen who were attempting to build personal fortunes and who were willing to take on huge risks to do so. Prior to the real estate recession of the early 1990s, it was not uncommon for individual properties to carry mortgages that represented over 90 percent of the properties’ estimated market value or cost of construction. Occasionally, loan-to-value ratios went even higher. The severe real estate recession of the early 1990s forced many real estate lenders, developers and owners to reconsider the appropriate use of debt financing on real estate projects.Today, properties owned by REITs are financed on a much more conservative basis. On a
