Author(s)

David J. Moore, Nuriddin Ikromov

College of Business Administration, California State University, Sacramento, CA, USA.

We propose a real option framework to value distressed properties and restructure their loans. Our approach reconciles the interests of borrowers and lenders through a constrained optimization model yielding mutually beneficial restructure terms. Borrowers receive lower loan balances and payments, while lenders replace non-performing loans with performing loans that have higher market values. A numerical illustration shows that the market value of a restructured loan can exceed that of the original non-performing loan and the post-foreclosure cash flows when the lender repossesses the property.

Real Option, Real Estate, Restructure, Distressed Property, Market Value

Moore, D. and Ikromov, N. (2015) A Real Options Approach to Distressed Property Borrower-Lender Reconciliation. Journal of Mathematical Finance, 5, 73-81. doi: 10.4236/jmf.2015.51007.