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Wolters Kluwer/Aspen Publishers
Real Estate Finance
Historical data and Monte Carlo simulation is used to examine the likelihood of loan extension and potential losses associated with extension. It is found that extension probability is highly sensitive to property NOI growth, to NOI volatility, to the amortization schedule, and to the loan term. It is found that extension risk is largely unaffected by changing credit spreads, changing yield curve assumptions, and changing term default assumptions. It is found that changing the underwriting standards affects the probability of loan extension in a somewhat muted way. It is estimated that the loss during extension is approximately 2%-3% of the outstanding loan amount at maturity.
Tu, Charles C. and Eppli, Mark, "Extension Risk in Commercial Mortgages" (2002). Finance Faculty Research and Publications. 18.