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Value difference direct cap to yield cap

Discussion in 'Commercial/Industrial Appraisals' started by CANative, Oct 5, 2011.

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  1. CANative

    CANative Elite Member

    33
    Jun 18, 2003
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    No big deal just wanted some input. Doing a economy/limited service motel. Direct cap indicates $3.7mm (rounded), yield cap indicates $4.1mm (rounded).

    Is this too much of a difference? Direct cap is from 2009 revenues which are worse than 2008 and better than 2010. 2011 is turning out to be a better year and I'm projecting a revenue escalation of about 3% per year on a 10 year holding period.
     
  2. MAIorBust

    MAIorBust Junior Member

    0
    Feb 25, 2007
    Professional Status:
    Certified General Appraiser
    State:
    Texas
    A few things popped in my head when reading your post. First of all, why would you use 2009 income instead of the present year? You already said 2011 was (is) a better year so wouldn't that reflect in a higher value and thus more in line with the DCF?

    I would personally steer clear of the DCF in this instance. History as shown that this property has a fluctuating income(which is very understandable in our current environment). So your projection of a 3% increase per year is really just a guess.

    Why not just do a direct cap on 2011 income? Wouldn't that be much more indicative of its present value than guessing about the future or using income from 2 years ago?

    Good luck!
     
  3. PropertyEconomics

    PropertyEconomics Elite Member

    0
    Jun 19, 2007
    Professional Status:
    Certified General Appraiser
    State:
    New Mexico

    Its a tax appeal ... they are using the income for the taxing year as authorized by law .. I am guessing. The assignment is most probably to establish market value as of 2009 ....

    My question is does this segment of the market utilize yield capitalization when doing their due diligence or when making a decision to purchase?
     
  4. PL1957

    PL1957 Senior Member

    4
    Jul 19, 2004
    Professional Status:
    Certified General Appraiser
    State:
    Illinois
    Yes it does. Unless the buyer is extremely unsophisticated, some type of DCF will be done, often incorporating whatever PIP would be necessary (assuming it's a flagged operation).
     
  5. Pittsburgh Pete

    Pittsburgh Pete Elite Member

    7
    May 6, 2008
    Professional Status:
    Certified General Appraiser
    State:
    Pennsylvania
    Given the relationship between a cap rate and a discount rate, does the cap rate reflect the anticipated 3% annual income growth? Generally speaking, if the cap rate and discount rate reflect similar expectations the results should be closer than your 10%+/- spread.
     
  6. Denis DeSaix

    Denis DeSaix Elite Member

    44
    May 16, 2005
    Professional Status:
    Certified General Appraiser
    State:
    California
    I would think it to be relatively difficult to do a retrospective DCF for that period of volatility without having some kind of "source" to hang my hat on regarding the income growth rates that were used by market participants at that time.

    Looking at some historic information (national survey, economy hotels) the OAR was 10.75 and the discount rate was about 2% higher (1Q2009). But the occupancy change from 2009 - 2010 was only +0.4%. For that same YOY, ADR declined (-1.5%) and nominal REVPAR was down (-1.3%).

    Did market participants anticipate declining revenues from 2009-2010 at that time and then a recovery 2-3 years later (vs. 3% growth per year)? If so, that may explain the difference (at least that's what I think).
     
    Last edited: Oct 6, 2011
  7. CANative

    CANative Elite Member

    33
    Jun 18, 2003
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    Yes. It is a tax appeal matter. The value date is January 1, 2010.

    So it is like doing a retrospective appraisal. So, no a buyer would not know about the future but I already know the future. If my work had to comply with USPAP I probably wouldn't use the 2010 income data in the DCF model.

    My RevPAR escalation assumption of 3% per year is based on several survey's I've read and take from numerous hotel appraisals I've studied from some of the top hotel appraisal companies. I also have inside information from my client that they think 2011 is going to be better than the years before so, to me, this kind of confirms that my assumptions are solid.


    Yes. Except in my client's case he was a noob to the hotel business and and now states he wishes he understood this metric.

    I have another hotel question but maybe I should start another thread. I'll put it here for now:

    FFE. The income statement on this property I'm working has a line item for Equipment leasing/rental of just over $44,000. When I questioned him he stated it a lease on new in-room TV/Computer systems (61 total). It includes the television, a computer system, installation, etc. (a package.)

    If the equipment is leased is this still FFE?
     
  8. CANative

    CANative Elite Member

    33
    Jun 18, 2003
    Professional Status:
    Certified Residential Appraiser
    State:
    California
    I found an error in the expenses for years 1 and 2 (small percentage difference) and corrected the dcf model.

    The two values are now virtually the same.
     
  9. PropertyEconomics

    PropertyEconomics Elite Member

    0
    Jun 19, 2007
    Professional Status:
    Certified General Appraiser
    State:
    New Mexico

    Denis .. when are you going to sit for the CG exam? Your knowledge is VERY VERY good ... the appraisal world needs a CG like you.
     
  10. Denis DeSaix

    Denis DeSaix Elite Member

    44
    May 16, 2005
    Professional Status:
    Certified General Appraiser
    State:
    California
    PE:

    I very much appreciate your (and others on this forum) endorsement.

    I had hoped to submit my hours by the end of this year. Still a chance... we'll see.

    Its interesting when I chime in on CAN's questions regarding hospitality properties. I had the opportunity to go on one of his inspections of a very large (large in my view) facility in Oakland one day. It was a learning experience. Then, I had to bone-up on all these terms he was throwing out at me (REVPAR, ADR, etc.). I think he was gently trying to give me a crash-course in hotel valuation.

    I have nothing but respect for appraisers like you, CAN, and others who swim in the commercial waters. From my perspective (20-years of residential appraising), the differences are significant: I'm good at residential, but rarely do the assignments require all the appraisal skills every appraiser is required to accumulate to obtain their license. My limited experience in the commercial waters is that each assignment requires application of those skills. Maybe if I become an old-hand, the commercial assignments will become mundane... though I doubt it!
     
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