discussion for 527.pdf - Capitalization Rates Capitalization rates are used to value different real estate investments These rates measure what the

discussion for 527.pdf - Capitalization Rates...

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Capitalization Rates: Capitalization rates are used to value different real estate investments. These rates measure what the value is and furthermore, with these values, we can compare real estate investments based on these rates. “In the simplest of terms, the cap rate can be a useful tool when it comes to comparing similar real estate investment properties” (Investopedia). These rates help identify how much an entity is worth and puts it in similar terms to other entities so that they can easily be compared. You cannot compare apples to oranges, therefore, to compare these entities, they need to be put into the same rates. Moreover, a valuation of an entity is when a valuator values the entity for financial purposes such as analyzing their assets and liabilities. The valuator wants to see how much the entity is worth. Evidently, these two things go hand in hand because valuators use capitalization rates. Using these rates are crucial in regards in assisting valuations because these rates help the valuator analyze the entity's value. Capitalization rate is calculated by taking the annual Net Operating Income divided by the price or value. For example, if someone wants to buy a property for $800,000 and the expect it will generate $130,000 of net operating income, then the cap rate for the investment would be .1625 so that would be 16.25% cap rate. Now, this rate can be used to value the investment. The person can find another investment property, find the cap rate and normally would pick the entity with the higher cap rate. Obviously, there are other factors involved such as location of entity and how old, but these cap rates help valuators value the entities in simpler terms. Fairness Opinion: A fairness opinion is a report prepared by the financial advisor that evaluates the types of purchases and provides an opinion as to whether or not the proposed stock price is fair to the selling or target company. The analyst examines the specifics of the deal, the terms of agreement, and the price offered for the stock of the seller. A fairness opinion is necessary, for private companies involved in shareholder buyouts, purchase price assessments, and roll-ups where two or more companies are being merged and consideration shares are being exchanged. However, during a normal transaction, the buyer will rarely commission a fairness opinion since the buyer is determining the enterprise value of the target, and it's on the target and its advisors to assess the fairness of such offer. In this case, the fairness opinion report is not necessary but a detailed valuation of the seller along with ana assessment of the transaction structure and tax consequences are produced instead. Either the seller has sufficient knowledge to assess an offer or the seller seeks advice on the offer fairness by getting an valuation.
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  • Spring '18
  • Lohrey

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