Abstract
Lusht has shown, through a single-period model, that the presence of debt will increase the net present value of a real estate investment if inflation is anticipated. Also, amortization of the debt magnifies the positive impact on present value of increases in the inflation rate. However, the analysis of a two-period present value model, with particular focus on financing terms, shows that this is not the case. Specifically, if the existence of debt has a positive impact on the net present value of an investment, reducing the level of debt should reduce the benefits. Second, the amount of benefit derived from debt financing depends on the interest rate paid. The interest rate will be based, in part, on the forecasts of inflation made by all market participants. The actual impact of inflation on real estate investment value will be based on how real rates of return will change in response to expected inflation. Lusht agrees with many of Rystrom's comments, but indicates that Rystrom has missed the main focus of his (Lusht's) conclusions. Notes.