Chapter 8: Valuation Using the Income Approach
FIN497: Real Estate Principles
1. Data for five comparable income properties that sold recently are shown in the
a) What is the indicated overall cap rate (
I used the median of the 5 rates, which is 10%.
b) If the reconstructed NOI of the subject property is estimated to be $ 60,000,
what is its value?
V=I/R … therefore, using the cap rate from above =>
60,000/.10 = 600,000.
2. Why is the market value of real estate determined partly by the lender’s requirements
and partly by the requirements of equity investors?
Not certain I understand this question, and I couldn’t find a specific answer in
chapter 8, so I’ll take and educated guess here. Lender’s are concerned with
getting back their principal plus the interest, so knowing market value is key to
determining the risk and what rate to apply, whereas investor’s strive try to get the
lowest rate possible and apply that in their decision to shop around for the best
rate (e.g. when the market is in an upswing and a greater level of risk is
acceptable, rates tend to be low, and when the market favors conservative, low
risk loans, rates are less competitive).
3. Assume a reserve for nonrecurring capital expenditures is to be included in the pro
forma for the subject property. Explain how an above-line treatment of this expenditure
would differ from a below-line treatment.
Above line CAPX entries are subtracted from revenues to determine NOI, which
in the “real-world” (as opposed to the textbook’s suggestion) is not practiced,
since it doesn’t reflect an accurate assessment of NOI. Whereas, a Below-line
CAPX entry would not artificially impact the NOI. [note – from my notes, as
presented in class by Mr. Jagger].