Unfortunately, in today's climate, the cap rate is established by the market trends and by what has sold in a particular area. There are published reports giving that information that the appraiser uses in determining what that cap rate will be. This is a big factor in determining value. For example, income and expenses on a property may not have changed in the last few years but because the cap rate has increased, the value of a property has been reduced. In using the formula NOI divided by cap rate = Value, you can see that there would be a huge difference in the value depending on whether the cap rate was 6% or 9%. This will be a problem for commercial owners wishing to refinance their 5 year balloon loans over the next few years.
Nov 16, 2010