The Market Value application is
based on current market data that is reasonably available, readily obtainable,
and easily verifiable. Unlike some other available income capitalization
computer programs, this application does not require the user to
assume an equity yield rate (internal rate of return). Likewise, it does not require
rate assumptions that are based solely on historical market data, or on
comparison of return rates for alternative (non-real estate) investments. In
fact, this application actually computes a probable equity yield rate by
logically based considerations of current market data and reasonably probable
conclusions of anticipated future property performance.
The required ďoperating performance?input data can be reasonably estimated by consideration and analysis of the operating history for the property being appraised, together with data pertaining to operating histories of other favorably comparable similar properties.
Using this application with these reasonably available, easily obtainable, and readily verifiable input data, there is no longer a need (or justifiable reason) to rely on vaguely supported or doubtful assumptions based on national average equity yield rates, dividend rates, overall capitalization rates, terminal capitalization rates, etc.
The logic for this application is based (among other things) on recognition of the following market supported, real life factors. First, the typical investment real estate transaction involves some combination of mortgage and equity funding. Next, loan-to-value ratios for such transactions are typically higher than equity-to-value ratios. Thus, for the typical investment real estate transaction - current market lending criteria has a significant (and often the greatest) influence upon virtually all (market equivalent) income and value related ratios. For example, this application can clearly demonstrate that a change in current market - mortgage interest rates, loan-to-value ratios, debt coverage ratios, amortization and/or other lending terms, will result in changes of indicated value, overall capitalization rate, equity dividend rate, equity yield rate, and other income -value related ratios.
This application has a significant advantage over most (if not all) other available income capitalization computer programs that employ input data that are primarily (or exclusively) based on historical performance of comparable properties or competing investments. The following hypothetical scenario illustrates this advantage.
An appraiser has been given an assignment to estimate the current market value of an existing investment property as of today's date.
Having gathered and considered all other reasonably available data pertinent to each of the three traditional appraisal approaches, the appraiser must now obtain justifiable conclusions of the various appropriate income capitalization rates. To this end, the appraiser has interviewed numerous investors for similar properties in the local market and has obtained and carefully considered reported data from several national publications regarding real estate and other investment performance results. All of the local investors interviewed were involved in ownership and operation of favorably comparable properties that were purchased within the past ten years with the most recent purchases occurring about six months to one year ago. The most recent national publication was published about two months ago and reported investment performance results for the quarter year period immediately preceding the publication date.
Based on the investor interviews, as well as data from the national publications, its clearly apparent that typical performance results for this type property over the past year were within the following narrow ranges:
Based on these data the appraiser might easily conclude that rates within the indicated ranges are appropriate for this appraisal and are well supported. However, there is one additional factor that should be considered. Current typical market mortgage interest rates are one full percentage point (over 14%) higher than they were just two months age and there is no available sales, or income and expense data from transactions involving favorably comparable property that reflects this recent change in market conditions.
Faced with this final consideration, the appraiser elects to conduct a survey of typical lenders for the type of property being appraised and finds that the current market typical lending criteria include:
Using this information (together with all other previously obtained conclusions) and the N-CAPíR Market Value application, the appraiser now calculates the following appropriate income capitalization rates.
Assuming that the appraiser's estimated stabilized Net Operating Income for the property being appraised was $482,000 per year, the indicated current market value would be $5,000,000 and substantially lower than it would have been if the income were capitalized at rates between 8 to 9 percent.
From this illustration, its obvious that without N-CAPíR or the techniques programmed into its Market Value application, the appraiser could have easily made a significant error based on traditional appraisal methods and available historic market data.
Calculated results from the Market Value applications include:
The calculated results from the Market Value application do not require user input of an assumed or specified Equity Yield (or discount) Rate. In fact, this application actually calculates a probable equity yield rate by using other input data that is independent of the equity yield rate. For example, by using a conventional mortgage-equity band of investment technique with inputs of loan-to-value ratio, equity-to-value ratio, mortgage capitalization rate (or mortgage constant), and equity capitalization rate (or equity dividend rate) it is obvious that the overall capitalization rate is not dependent on a specified equity yield rate. This fact can be illustrated as follows:
From this simple calculation it is clearly obvious that an overall capitalization rate may be determined without specific consideration of an assumed equity yield rate. Thus, for any appraisal problem involving property that is typically financed with a combination of mortgage and equity capital, an appropriate overall capitalization rate (as well as other pertinent income and value relationships) can (and often probably should) be calculated independent of inputted equity yield rate data.
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