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Sinking fund brain f*t

Discussion in 'Commercial/Industrial Appraisals' started by John Marshall, Oct 16, 2011.

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  1. John Marshall

    John Marshall Member

    0
    Jan 15, 2002
    Professional Status:
    Certified General Appraiser
    State:
    Georgia
    Say 75% loan, 8% rate, 15% equity yield, 15 year holding period, must the sinking fund rate be at the equity yield rate of 15%?
     
  2. PropertyEconomics

    PropertyEconomics Elite Member

    0
    Jun 19, 2007
    Professional Status:
    Certified General Appraiser
    State:
    New Mexico
    Are you doing a band of investment?
     
  3. John Marshall

    John Marshall Member

    0
    Jan 15, 2002
    Professional Status:
    Certified General Appraiser
    State:
    Georgia
    Yep, but not me. An example presented to me that I disagreed with.
     
  4. Pittsburgh Pete

    Pittsburgh Pete Elite Member

    25
    May 6, 2008
    Professional Status:
    Certified General Appraiser
    State:
    Pennsylvania
    If building a cap rate, you would use the sinking fund factor at the equity yield rate for the holding period.
     
  5. John Marshall

    John Marshall Member

    0
    Jan 15, 2002
    Professional Status:
    Certified General Appraiser
    State:
    Georgia
    Thank you, won a glass of Cabernet over that. Hope no one else chimes in with any opposite comment.
     
  6. Pittsburgh Pete

    Pittsburgh Pete Elite Member

    25
    May 6, 2008
    Professional Status:
    Certified General Appraiser
    State:
    Pennsylvania
    Can't be another answer--adjustment reflects the return on the increased equity over the holding period. Can't imagine anyone projecting two separate equity yields--one for the initial investment and one for the accruing equity.

    Bottoms up!
     
  7. Howard Klahr

    Howard Klahr Senior Member

    44
    Oct 4, 2004
    Professional Status:
    Certified General Appraiser
    State:
    Florida
    The Financial Manager Rate of Return analysis utilizes two different return rates, one for the investment rate and another for the re-investment (safe) rate.
     
  8. Pittsburgh Pete

    Pittsburgh Pete Elite Member

    25
    May 6, 2008
    Professional Status:
    Certified General Appraiser
    State:
    Pennsylvania
    Safe rate typically would be applied to negative cash flows under FMRR.
     
  9. Howard Klahr

    Howard Klahr Senior Member

    44
    Oct 4, 2004
    Professional Status:
    Certified General Appraiser
    State:
    Florida
    Sorry, incorrect. FMRR is based on the presumption of re-investing ALL cashflows (positive or negative) at a safe rate.
     
  10. Pittsburgh Pete

    Pittsburgh Pete Elite Member

    25
    May 6, 2008
    Professional Status:
    Certified General Appraiser
    State:
    Pennsylvania
    I guess I'm not alone in being incorrrect:

    Here’s how it works. All negative cash flows are discounted back over the course of the holding period at the safe rate until they are fully covered by the positive cash flows, and then all the positive cash flows are compounded foreward over the course of the holding period at the reinvestment rate. The result is the financial management rate of return; the rate of return an investor might expect to receive on real estate projects of that length of term and reinvestment risk.
     
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