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Real Estate Feasibility Test 1
10-Valuation of Income Properties:Appraisal and the Market for Capital
46
Real Estate & Planning
Undergraduate 4
09/20/2009

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Cards

Term
Market Value
Definition

The most probable price which a property should bring ...

  • in a competitive and open market
  • under all conditions requisite to a fair sale
  • the buyer/seller acting prudently and knowledgeably
  • assuming the price is not affected by undue stimulus
Term
appraisal process
Definition
  1. Ascertain the physical and legal identification of the property involved
  2. Identify the property rights to be appraised or valued
  3. Specify the purpose of the appraisal
  4. Specify the effective date of the estimate of value
  5. Gather and analyze market data
  6. Apply appropriate techniques to derive the estimate of value
Term
Sales Comparison Approach
Definition
based on data provided from recent sales of properties highly comparable to the property appraised
Term
Stipulations when using the Sales Comparison Approach
Definition
  • arm's-length
  • normal market transactions

 

Term
What is the rationale for the sales comparison approach?
Definition
an informed investor would never pay more for a property than what other investors have recently paid for comparable properties
Term
For the Sales Comparison Approach, what are the two adjustments that can be made?
Definition
  1. price per square foot paid for each comparable can be adjusted to determine the market value for the subjec
  2. the relationship btwn gross rental income and sale prices on the comparable can be applied to the subject with appropriate adjustment
Term
Adjustments on the square footage cost should be made....
Definition
relative to the property being valued
Term
Positive features that comparables possess relative to the subject property...
Definition
require negative adjustments
Term
The income approach is based on
Definition
..the principle that the value of a property is related to its ability to produce CF
Term
In the income approach, what are two techniques that are similar to the sales comparison approach, but focus more on income-producing aspects
Definition
gross income multiplier and direct capitalization
Term
gross income multipliers
Definition

relationships between gross income and sale prices for all comparable properties that are applied to the subject property

 

GIM=Sales Price/Gross Income

Term
a GIM of 6 means...
Definition
the comparable property sold for 6 times the current gross income
Term
What is the difference between potential gross income and effective gross income?
Definition
PGI assumes all space is occupied
Term
When would you use EGI in comparing properties?
Definition
If the vacancy rates for a comparable is very high
Term
What is an additional assumption that is critical to the GIM method?
Definition
That all subjects operating expenses are about the same poportion of gross income
Term
How is a GIM of R chosen for the subject property?
Definition
The appraiser places more weight on some than others...does not average
Term
If the appraiser cooses a GIM of 6 for the subject property who has an expected gross income of $36,600. What is the sale price?
Definition
6x $355,100= $59,185
Term
If there is a large disparity in operating expenses..what should you analyze? NOI or GIM?
Definition
NOI
Term
net operating income is found by...
Definition
subtracting operating expenses from rents reported on comparables at the time of sale
Term
Cap Rate
Definition
R=NOI/Value
Term
Can the GIM and Cap Rates approach provide clues into investment potential?
Definition
NO...only serves as benchmarks
Term
comparability means..
Definition
very similar in quality, of construction, size,age, functionality, location, and operating efficiency, lease maturities, lease options, rent escalators, easements, title restrictions etc
Term
When do we want to forcast and analyze cash flows over a period?
Definition
When we can forsee any material change in market supply and demand...
Term
discount rate (r)
Definition
required return for a real estate investment based on its risk when compared with returns earned on competing investmens and other capital bench marks
Term
If the period of analysis is 10 years for our prospective real estate investment, the discount rate selected should be...
Definition

greater than

  1. interest rate on a 10 t bill
  2. '' 10 year commercial mortgage loan
  3. WACC of corporate bond rates or borrowing rates for tenants in the property being evaluated(must be rewarded for buying and not renting)
Term
What is the riskiest investments and highest returns in order...
Definition
  1. Stocks
  2. Real Estate
  3. Corporate Bonds
  4. Commercial Mortgages
  5. T Bills
Term
What are the 4 steps in estimating the present value of an income producing real estate?
Definition
  1. Forecast NOI
  2. Holding Period
  3. Discount Rate
  4. Reversion Value
Term
Three approaches to finding a reversion value...
Definition
  1. Developing Terminal Cap Rates Based on Expected Long Term Cash Flows
  2. Estimating the Terminal Cap Rate by Adjusting the Going In Cap Rate
  3. Estimating the resale price based on an expected chagne in property values
Term
  1. RT=(r-g)
  2. RT=(g)
  3. RT=(r+g)
Definition
  1. RT=(r-g)when average long-run growth (g) in NOI is expected to be positive
  2. RT=(g) when long-run growht is expected to be zero

  3. RT=(r+g) when long-run growth is expected to be negative

 

Term
Why would the terminal cap rate larger than the going in cap rate?
Definition
over time properties age and the NOI for an older property should be less than a new
Term
residual land value
Definition
difference between total property value which is driven by rents and CFs, and the cost of constructing an improvement on a given site
Term
What is a probable reason for volatility in land prices?
Definition
fundamental change in a location has occured, or is expected to occur, thereby changing one of the variables in our PV equation
Term
What is a "free and clear" discount rate?
Definition
does not consider whether the property was to be financed or what was the debt to equity
Term
Value (V) must be equal to the
Definition
present value of expected mortgage financing (M) and the present value of equity investment (E) mad by investors
Term
Why would NOIs and Present Values be different?
Definition
capitla expenditures and nonreccuring outlays
Term
Excess supply produces...
Definition
rising cap rates
Term
When demand exceeds supply of availible rental space, this tends to ....
Definition
reduce cap rates and increase proeprty valeus
Term
Increase in long term interest rates lead to...
Definition
decline in PV and higher Cap Rates and higher required returns
Term
As interest rates fall....
Definition
PV rises and Cap Rates Fall and required rates fall
Term
Excess supply and rising interest rates
Definition
major decline in property values and a significant increase in cap rates
Term
Lower cap rates(higher property values) tend to be brought about by:
Definition
  1. Unanticipated increases in the demand for real estate relative to supply
  2. Unanticipated decreases in supply
Term
Higher market cap rates(lower proeprty values) tend to be brought about by:
Definition
  1. Unanticipated increases in the supply for real estate relative to demand
  2. Unanticipated increases in interest rates
Term
Cost Approach
Definition
any informed buyer of real estate would not pay more for a property than what it would cost to buy the land and build the structure
Term
The essence of the cost approach is...
Definition

to price the improvement at its current replacement cost...then that amount is reduced by any costs that

  1. can be expended to upgrade the improvement or to cure obvious deterioration due to needed maintenance
  2. or that correspond to the economic loss associated with nonrepairable factors due to changes in design or layout efficiency that may make newer buildings less expensive to operate
Term
The cost approach should be used when...
Definition
the structure is relatively new and depreciation does not present serious complications
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