Ch.8-Study Questions - Chapter 8: Valuation Using the...

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Chapter 8: Valuation Using the Income Approach Robb Page 11-Feb-2010 FIN497: Real Estate Principles Professor Clements Study Questions 1. Data for five comparable income properties that sold recently are shown in the accompanying table. Property NOI Sale Price Overall Rate A $57,800 $566,600 0.1020 B $49,200 496,900 0.0990 C $63,000 630,000 0.1000 D $56,000 538,500 0.1040 E $58,500 600,000 0.0975 a) What is the indicated overall cap rate ( R 0 )? 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]. 1
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Chapter 8: Valuation Using the Income Approach 4. Use the following property data: Cash flow from operations: Year 1 2 3 4 5 NOI $150,000 $150,000 $150,000 $150,000 $150,000 Debt service $125,000 $125,000 $125,000 $125,000 $125,000 Cash flow at sale: Sale price: $2,000,000 Cost of sale: $125,000 Mortgage Balance: $1,500,000
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This note was uploaded on 04/25/2010 for the course FIN 497 taught by Professor Clements during the Spring '10 term at University of Missouri-Kansas City .

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Ch.8-Study Questions - Chapter 8: Valuation Using the...

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