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How Many of You Still Use a Sinking Fund Premise to Develop Cap Rates?

Terrel L. Shields

Thread Starter
Elite Member
Gold Supporting Member
Joined
May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
Commonly known as the Ellwood formula. No wonder why folks question real estate appraisals on commercial properties. This formula does not reflect the actions of informed real estate investors.​

In developing the cap rate, it appears to be the old tactic of adding a multiple to the current T bill rate for a similar holding period is distorted by the intervention of the FED in rate suppression. If Fed fund rates reach negative territory (like in Europe) how can you used a negative cap rate? Seems to be that the market is demanding a far higher rate than Fed fund plus X times the Fed rate or your chosen equity fund rate related to current interest rates. High risk enterprises will demand rates that would not have any relationship to current Fed rates.
 

GregoryK

Junior Member
Joined
Jan 5, 2011
Professional Status
Certified General Appraiser
State
Tennessee
Commonly known as the Ellwood formula. No wonder why folks question real estate appraisals on commercial properties. This formula does not reflect the actions of informed real estate investors.​

In developing the cap rate, it appears to be the old tactic of adding a multiple to the current T bill rate for a similar holding period is distorted by the intervention of the FED in rate suppression. If Fed fund rates reach negative territory (like in Europe) how can you used a negative cap rate? Seems to be that the market is demanding a far higher rate than Fed fund plus X times the Fed rate or your chosen equity fund rate related to current interest rates. High risk enterprises will demand rates that would not have any relationship to current Fed rates.
Well, at least for now, even shortest maturity rates aren't negative. But if you count inflation, maturities up to 10-year yields are already negative. But inflation should be factored into the rate as part of the risk.
 
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