PL1957
Senior Member
- Joined
- Jul 19, 2004
- Professional Status
- Certified General Appraiser
- State
- Illinois
John's question came from the real world. Curtis gave a "correct" test-taking answer. I pointed out areas where there was a disconnect.
The Premier Online Community for Real Estate Appraisers!
-
Welcome to AppraisersForum.com, the premier online
community for the discussion of real estate appraisal. Register a free account to be able to post and unlock additional forums and features.
Developing a discount rate
- Thread starter Ken B
- Start date
- Status
Curtis West
Sophomore Member
- Joined
- Jun 7, 2002
- Professional Status
- Certified General Appraiser
- State
- North Carolina
PL,
The answers that I gave were specifically intended to respond to the statement of the questions. As you can easily see, I did not assume conditions that were not stated. The answers illustrate the fact that the terminal capitalization rate will be greater than the going-in capitalization rate when (for whatever reason) the value of the property increases to a greater extent than the extent of increase in net operating income for that property. Surely, based on the statement of the questions, you will agree that the value of the property at the end of each analysis period was greater than the value at the start of each analysis period. Furthermore, an assumption that the property in question will have a lower value or less assured income at the end of the analysis periods was not warranted by the statement of the questions.
I agree with you comment that the answers may or may not have any relevance when it comes to investor behavior. Hopefully you did not intend to suggest that there would never be a circumstance where the answers do have relevance.
The answers that I gave were specifically intended to respond to the statement of the questions. As you can easily see, I did not assume conditions that were not stated. The answers illustrate the fact that the terminal capitalization rate will be greater than the going-in capitalization rate when (for whatever reason) the value of the property increases to a greater extent than the extent of increase in net operating income for that property. Surely, based on the statement of the questions, you will agree that the value of the property at the end of each analysis period was greater than the value at the start of each analysis period. Furthermore, an assumption that the property in question will have a lower value or less assured income at the end of the analysis periods was not warranted by the statement of the questions.
I agree with you comment that the answers may or may not have any relevance when it comes to investor behavior. Hopefully you did not intend to suggest that there would never be a circumstance where the answers do have relevance.
PL1957
Senior Member
- Joined
- Jul 19, 2004
- Professional Status
- Certified General Appraiser
- State
- Illinois
Curtis, I think that we are seeing more and more of a disconnect between the traditional "textbook" answers to questions and what the market is actually doing. I think the AI is seeing that and is trying to address it in some of their new seminars. I took the new "Office Building Valuation: A Contemporary Perspective" seminar developed by Barrett Slade and though it was outstanding because it got away from looking for the "right" answers. It spent a lot of time on real world situations and real world analysis, down to having actual ARGUS cash flows in the examples.
john snyder
Senior Member
- Joined
- Jul 27, 2002
- Professional Status
- Certified General Appraiser
- State
- Michigan
Is the applied terminal rate in a DCF projected to be higher then the discount rate when no increase in value is projected?
john
john
Curtis West
Sophomore Member
- Joined
- Jun 7, 2002
- Professional Status
- Certified General Appraiser
- State
- North Carolina
John Snyder,
Assuming all other factors remain the same: If there is no change in value and no change in income, the terminal (overall) cap rate and the discount (overall yield) rate will be equal (assuming – you are using the overall yield rate as a discount rate). If the is no change in value but there is a change in income there will be a difference between the terminal (overall) cap rate and the discount (overall yield) rate. For example (again assuming all other factors remain the same); if the value does not change but the income increases, the terminal (overall) cap rate will be higher than the discount (overall yield) rate. Conversely, if the value does not change but the income decreases, the terminal (overall) cap rate will be lower than the discount (overall yield) rate.
Assuming all other factors remain the same: If there is no change in value and no change in income, the terminal (overall) cap rate and the discount (overall yield) rate will be equal (assuming – you are using the overall yield rate as a discount rate). If the is no change in value but there is a change in income there will be a difference between the terminal (overall) cap rate and the discount (overall yield) rate. For example (again assuming all other factors remain the same); if the value does not change but the income increases, the terminal (overall) cap rate will be higher than the discount (overall yield) rate. Conversely, if the value does not change but the income decreases, the terminal (overall) cap rate will be lower than the discount (overall yield) rate.
- Status