jawz

Assume you have estimated that a shopping center investment will provide a 3.5 percent appreciation-adjusted return, a 3 percent liquidity premium, and a one percent risk premium. If the prevailing rate on government bonds, net of real estate tax savings, is 6.25 percent, the capitalization rate determined using the built-up technique is closest to:

A) 14.75%.

B) 14.00%.

C) 13.75%.

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The current capitalization rate (C0) may be expressed as:
C0 = pure rate + liquidity premium + recapture premium + risk premium.
= 6.25 + 3.00 + 3.50 + 1.00 = 13.75%.

jawz

Which of the following statements most accurately describes the capitalization rate used for real estate valuation?

A) The capitalization rate is the rate of return that equity investors require on similar-risk real estate investments net of the expected constant growth rate of net operating income.

B) The capitalization rate is the rate of return that equity investors require on similar-risk real estate investments.

C) The capitalization rate is one plus the constant growth rate of net operating income.

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The capitalization rate (C) is the rate of return that equity investors require on similar-risk real estate investments (k) net of the expected constant growth rate of net operating income (g). That is, C = k - g.

jawz

Which of the following statements is most accurate regarding real estate capitalization rates?

A) As the difference between the required return on equity capital and the growth rate in NOI (g) increases, value estimates will also increase.

B) Generally, as interest rates increase, capitalization rates increase and value estimates decline.

C) If during periods of rising inflation, there is an increase in net operating income (NOI) and the growth rate of NOI, capitalization rates and value estimates will increase.

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Where:

MV = estimated market value
NOI = the net operating income from a real estate investment.
k = the rate that equity investors require from a real estate investment.
g = the growth rate of NOI (assumed to be constant).
C = k – g = the market capitalization rate.

From this relationship, we see that:

• as the growth rate of NOI increases, capitalization rates decline and value estimates will rise,
• the capitalization rate is the spread between k and g. Thus, as the spread widens, value estimates decline, and
• holding k constant, value is directly related to g.

The effect of inflation on value estimates depends on its combined effect on the required return (k) and the growth rate (g). If the net result is to decrease (increase) the capitalization rate, value estimates will rise (fall).