Can anyone explain this cap rate calculation methodology?

Question

This was part of our new assessment on a >4U multi. I can't figure out why they have anything about mortgages in their cap rate calc, I thought cap rate was on a cash deal, where you got it was your business. They basically just used our rent roll and this cap rate to come up with the assessed value.  Had they comped our lot as a teardown it would have been at least 50% more!

Steve Vaughan · Answer

I think your assessor is using 60% LTV interest rate assumptions + ROE + taxes to establish the market cap rate.  Good idea for their purposes, really.  The cap rate or rate of return investors require to own an asset will rise when lending rates do.  If not, they will just become a lender. Why deal with tenants and toilets, maintenance and repairs without a premium?

Once they establish a cap rate (based on comparable lending rates + ownership PITA premium) they can then divide your NOI by that to establish assessed value.  My assessors have never asked for my NOI. I think they go by comps.  When a similar apt building sold in 2014 for a lot more than I bought mine for,  my assessed value rose 60% in 2015.

Johann Jells · Answer

@Steve Vaughan No, I'd be wanting to lower the taxes!  NJ has the highest taxes in the nation. Plus we're in the middle of the 1st reval in 30 years here, the older <5U homes in the most gentrified area are getting their taxes tripled in some cases. We dodged a bullet being commercial.  The only way we'd ever sell is as condos.

Johann Jells · Answer

No, I'm going to take my 23% tax rise and keep my head down! Plenty of people around here are getting doubled and tripled. 30 years is too long between revals. It would never occur to me to want to a higher assessment for resale value, around here assessments have been below 30% of FMV.

Immanuel Sibero · Answer

@Johann Jells

For a minute I too thought you were seeking a higher assessment. Maybe you can point out that 25% expenses are just way too low.

Cheers... Immanuel

Steve Vaughan · Answer

I hear you and you're welcome.

So you are seeking a higher assessment?  Most investors when they buy don't pay much attention to it and the only result will probably just be higher property taxes, reducing your NOI.

Can you subdivide? That may add value. I wouldn't appeal for a higher assessment. Just explain to your future buyer like you did here if needed.

Johann Jells · Answer

@Immanuel Sibero They took the rent roll from the rent control registration and calculated a NOI from that using a 3% vacancy rate and 25% expenses.

@Steve Vaughan  Thanks for answering the question rather than assuming I don't know a thing or not bothering to figure out what >4U means.  It makes me wonder if I can appeal the assessment if the rates go up significantly just on the basis of the changed cap rate.  Seem a vulnerability to them in their methodology.

Another artifact is that they don't seem to take lot size into account at all, when in an urban gentrified area the land has become the majority component of value.  There's houses on 12.5'x60' lots nearby asking the same as the assessed value of my 50'x100' property!  What if my lot were vacant? It's possible they screwed up as there's a field marked "excess land" that has a value of 0.

Immanuel Sibero · Answer

@Johann Jells

I'm assuming this is a true commercial multi since you indicated >4U (i.e. larger than 4 units). You can find more info at  https://www.propertymetrics.com/blog/2016/03/10/ho...

A couple of comments:

- Cap rate is a property specific metric and is commonly used to compare one property against another. Financing the property does not negate or render useless the use of cap rate.

- I would question the use of rent roll in calculating the assessed value. Why did they not use NOI?

Cheers... Immanuel

Hadar Orkibi · Answer

If its 4 units or less the income approach which Cap rates are used not so relevant.

residential units are appraised by per unit precises and CMA of comparable sales.

Cap rate is the Net Operating Income (excluding the cost of money) divided by the Purchase price.

In Lower cap rate market you will pay higher price to own a property.

lets say 100k income at 10% cap = 1million price

Same income 100k at 6cap market = $1.666million price

Why THEY have? who have?

Many sellers and Agents don't understand Ca prates and their proforma are nothing to go by.  do your own research and put your own numbers based on Actual numbers.