The Income Capitalization Approach and the Cap Rate
4.72
546 Reviews
In this 5th course of the Commercial Real Estate Underwriting Skill Series, participants will review differences between description and analysis in sales comparison and income capitalization approaches, examine capitalization rate components, and explore benefits and limitations of using income capitalization for estimating market value.
Certificate
1 credit or $295
Cost
1.5 - 2 Hrs.
Duration
1 hr.
Prep Time
1
Quiz
Overview
In the fifth webinar session, participants review the fundamental differences between description and analysis in assessing and interpreting the sales comparison approach to market value. They review the concepts underlying the income capitalization approach to value. They examine the components and considerations that shape and determine a capitalization rate. They review the rationale and limitations in using stabilized values for the key valuation assumptions under the income capitalization approach and the resulting implications for market value, property cash flow, financing, and debt service capability. In addition, participants explore the benefits and limitations of using the income capitalization approach in estimating market value for an income producing property.
Who Should Take This Course
This Course is ideal for participants currently in or aspiring to enter the following job functions:
- Credit Management
- Commercial Real Estate Administration
- Commercial Loan Portfolio Management
- CRE Lending
- Private Banking
- Loan Review
- Special Assets
- Construction Lending
- Credit Analysis
Prerequisites
Familiarity with accrual financial statements and accrual financial statement terminology for a commercial real estate operation, as well as completion of prior sessions in the Credit College.
Objectives
By the end of the webinar session, participants will be able to:
- Understand and explain the basic concepts and critical assumptions that underlie the income capitalization approach to estimating market value.
- Understand and explain the concepts underlying the conversion of a stream of income to an asset value, including key assumptions about movements or changes in the stream of income, in the interest rate structure, and in the applicable time horizon for a given stream of income.
- Identify the components that comprise an investor's rate of return on an income producing property and explain the relationship between the capitalization rate and the general structure of interest rates, yields on investments in comparable risk assets, and specific income producing property risk considerations.
- Identify differences, if any, between actual data for operating expenses and rental income and estimates for operating expenses and rental income used in arriving at an estimate of market value under the income capitalization approach and explain the rationale for using stabilized rather than actual values in the process.
- Assess the implications for market value, net operating income, financing amounts, and debt service capabilities from the use and application of actual versus stabilized values for rental rates, vacancy levels, and operating expenses.
- Assess the benefits, limitations, and practical use of the income capitalization approach to value in arriving at an estimate of market value for an income producing property.
Materials(access provided with registration)
- Credit Refresher on Net Operating Income or Market Value?
- Terms and Concepts - Commercial Real Estate
- Excerpts from Shadelands Glen's Appraisal Report
- Rent Rolls for Shadelands Glen
- Exercise for the Session 5 Webinar
- Webinar Presentation Slides
- Webinar Poll Questions
- Webinar Poll Solutions
- Exercise Solutions
This is Course 5 of 8 in the Commercial Real Estate Underwriting Skill Series
The CRE Analytical Process and Credit Write-Up
Borrower Cash Flow, Ratio Analysis and the First Way Out
Personal Cash Flow, Guarantor Analysis and the Second Way Out
Appraisal Reports and Assessing Market Value
The Income Capitalization Approach and the Cap Rate
Underwriting Standards, NOI and Breakeven Analysis
Management Assessment, Competitive Forces, and Projected Performance
Repayment Risks and Covenants
