Subjective Real Estate Valuation - PowerPoint Presentation

1. Subjective Real Estate ValuationG. Jason Goddard

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3. Chapter 6 Outline Chapter HighlightsJust a Few Little NumbersCap Rate UniverseDiscount Rates Mysteries RevealedRiddle of the Debt Yield

4. Chapter DefinitionsCap rate: The ratio of projected net income relative to sales price. Discount rate: Required rate of return (or rate of interest) for the investor taking into account opportunity costs, inflation, and the certainty of payment.Debt Yield: net operating income divided by the purchase price. From a loan underwriting perspective, it can also be defined as the mortgage constant multiplied by the desired debt service coverage ratio.

5. Cap Rate UniverseMarket AbstractionThird Party Market EstimatesBand of InvestmentsLender’s Yield Analysis (Gettel)Ellwood’s Mortgage Equity J FactorAkerson’s K Factor

6. Cap Rate UniverseImpact Value Change on Cap Rate

7. Cap Rate UniverseMarket Abstraction for Slick Apartments

8. Cap Rate UniverseBand of Investments Method

9. Cap Rate UniverseLender’s Yield Model (Gettel)

10. Cap Rate UniverseEllwood’s Mortgage Equity Method

11. Cap Rate UniverseAkerson’s Mortgage Equity Method

12. Discount Rate Mysteries RevealedImpact of Discount Rate Change on DCF Value

13. Discount Rate Mysteries RevealedWeighted Average Cost of Capital for Discount Rate

14. Discount Rate Mysteries RevealedExample of Built-Up Method for Discount Rate

15. Riddle of the Debt YieldDebt Yield vs. Debt Coverage Ratio over 25 years

16. Riddle of the Debt YieldDebt Yield vs. Debt Coverage Ratio over 20 years

17. Riddle of the Debt YieldDebt Yield vs. Debt Coverage Ratio over 15 years

18. Riddle of the Debt Yield33 Year View of Interest Rate Lending Indices

19. Riddle of the Debt YieldDebt Yield in Terms of DCRSolving for DY Hurdles at various loan amortizations

20. Chapter 6 QuestionsQuestions for DiscussionExplain the differences between a capitalization rate and a discount rate. Include how the perception of risk helps determine the final rate selected in each case.Describe the strengths and weaknesses of the debt yield as a lender underwriting metric.Provide examples to show the relationship between a property’s cap rate and the perceived risk by the investor.Elaborate on the strengths and weaknesses of the market extraction cap rate derivation model. Provide examples for when the weaknesses are most likely to materialize and elucidate examples of how to rectify this situation.Outline the components of the band of investments cap rate derivation model. Discuss which of these components are most subjective from the perspective of the lender and the investor.

21. Chapter 6 QuestionsQuestions for Discussion Describe the components of the lender’s yield cap rate derivation model. Discuss the strengths and weaknesses of this approach.Describe basic differences between the Ellwood and Akerson cap rate derivation models. In which market situations are these approaches the most and least useful? Explain the differences between the weighted average cost of capital and the built-up method of discount rate estimation. Elaborate on some common other practices for deciding on a discount rate for an investment real estate property.Outline the differences between the debt service coverage ratio and the debt yield. Include strengths and potential for subjectivity in these distinct calculations.Describe how the presence of loan amortization heterogeneity in a lender’s loan portfolio can create potential problems when utilizing the debt yield as a loan underwriting metric. Include some possible solutions to this debt yield riddle in your answer.

22. Chapter 6 Market VignetteQuestions for DiscussionWhat is the going in cap rate for this purchase?Given the known data, which cap rate derivation tools can be best utilized for this transaction?What are the limitations of using the cap rate tools in this case?How could these limitations be removed?Elaborate on other methods for deriving a market based cap rate.