How do lenders know what CAP rate to base a refinance on?

[Leo B.]

I'm starting to look into performing a 1031 exchange into an apartment complex and am looking for more information on value adds and how a lender obtains their valuation based on the CAP rate. See example below.

- 30 unit complex

- 80% occupancy

- 6% CAP rate based on current income and expenses

- $700K purchase price

- Value add is performed via renovation and increasing rents

- CAP rate is now 8% based on value add

- My assumption is value is higher based on the new CAP ratea dn I want to refinance and pull cash out.

My questions are:

1. How will lender value property after value add?

2. Is there a CAP rate for each specific area? How is this obtained?

3. For lenders, is there seasoning required for new rents to be coming in to be counted in the new CAP rate?

4. Is there a typical seasoning period for refinancing an apartment complex after initial purchase?

I'm in the beginning stages of research on this topic.  Thanks in advance for your replies!

-Leo

[Account Closed]

Cap rates are set by the market and do not change based on the change in income or expenses.  If these change then the VALUE changes.  Cap rate comps come from closed sales of similar properties in similar location at a similar time.  A sale will be analyzed by an independent third party after interviewing the buyer and seller. 

If the property you are buying is underperforming the value will be based on its potential NOI/current market cap rate LESS the costs to get it there. These will be actual costs and estimated costs of risk and lease up. $100,000 NOI/10% market cap rate = $1,000,000 value if fully performing. Subtract the lost rents and costs to get the property performing and include a risk factor. That will be the market value of the property as is.