Cap Rates?

[LuckyLucy48]

You are correct - it is an implied rate.
Another way to skin the cat when data is lacking - and, when taken into consideration with other factors, can produce a reliable indicator.
In a perfect world, all of our comps would be leased at market on the date of sale.
T

 

[Abester]

comps would be leased at market on the date of sale

A leased comp IS at market...

 

[Dennis J. Black ASA IFAS]

Not if the lease is 5,10, 20 years old.

 

[LuckyLucy48]

Yep, Dennis....
Abester - there are also other reasons why leased comps are not at market - either above or below market - uneducated lessor or lessee, not an arms length lease, holdover tenancy,etc. We also see some short-term tenancies that are over market rent.
Depending upon the duration of the lease, it might be necessary to examine leasehold and leased fee interests......
T

 

[PropertyEconomics]

Not if the lease is 5,10, 20 years old.

I just examined a lease that is 17 years old, tied to cpi, and currently is 27.5% above market rates. Calling and finding out what its leased at would sure lead you astray. I think Id know the market a bit better than is being suggested by a few here.
If you have no comps from your market, then go to a similar close market where the investors are the same (for smaller properties or local type properties). Perhaps regional or national markets will work on credit tenant type properties, but in this day, age, and economic climate, Id be very leery.

 

[Abester]

there are also other reasons why leased comps are not at market

Clearly we are referring to different things. A leased property and a lease comp are not the same thing.

I can't find any state board members who will tell me it's OK to uses non-leased properties to derive a cap rate. Please - I'd like just one board member to go on record indicating this is acceptable appraisal practice and would not result in a disciplinary action.

 

[farmguy]

If farm A sold and it is not leased, but two similar farms in the area are cash leased and appear comparable I would estimate cash rent for farm A and develop cap rate.

Abester, are you saying that is not correct methodology?

 

[Abester]

I don't know - you didn't say if you made up the cap rate. Based on the post, I'm making the assumption that you have two rented sales, and you have developed your cap rate by dividing the incomes by the prices. These are the market extracted rates, and you can certainly apply them to your subject.

On the other hand, if neither the subject nor the sales were leased, I would first question whether the income approach were applicable applicable to your subject (better valued by sales comparison). If, after that, you decided that you needed an overall rate so you guessed what the income would be for each sale and guessed at what the "typical" expenses were and then derived an implied cap rate, I'd ask why you bothered...

 

[PropertyEconomics]

I can't find any state board members who will tell me it's OK to uses non-leased properties to derive a cap rate. Please - I'd like just one board member to go on record indicating this is acceptable appraisal practice and would not result in a disciplinary action.

I would say you can do anything you wish, with full disclosure of what you did and how you did it. I would caution, that use of such a "developed" cap rate would be somewhat suspect if thats the only data you had. I would suggest that it can be done but it can only be done with caution and only as a test of reasonableness against your other value indications and should ONLY be done where you have adequate MARKET data on incomes and expenses that you feel comfortable applying to your subject / comps.
Data is data no matter how you arrive at it (as long as its from the market and not MADE UP) ... again assuming full disclosure and proper application. I cant imagine any disciplinary action for proper application and use of market dervied data (even if estimated) ... its misuse however may land you in hot water (and this includes making up data).

 

[farmguy]

Kyle take some of what you read here to heart and some not. Naturally if you are fortunate enough to have a number of comparable properties leased at market rates, all of which have sold recently and you subject is leased at market rates and all properties are comparable in all other regards then yes only use sales that are leased to develop a cap rate and apply to actual rent of subject.

If you don't live in that fairy tale world you may need to use some judgment. I would tend to agree with PE above. The more judgement used the more support necessary. Naturally if I have text book data there is no need to estimate anything. But you will have to analyze data on occaision. You can certainly estimate income on a sale that is not leased, but you have to support that with market data. You can apply a direct cap on a subject not leased. But it all has to be supported.

Be careful of the appraiser that says the income approach not applicable because the subject is owner operated or is not rented. That in itself is no reason not to complete approach.