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Postby tayalsubhakshi22 » Thu Mar 09, 2017 1:51 pm

Why capitalization rate is lower than terminal growth rate

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Postby edupristine » Mon Mar 27, 2017 11:32 am

Hi Tayal,

A cap rate is a discount rate less a growth rate. The reciprocal of the cap rate is a multiple that can be applied to NOI. The cap rate is estimated for a given property based on relevant information, including cap rates on sales of comparable properties, general business conditions, property quality, and assessment of management. The analysis might include assessing the strength of tenants, the level of landlord involvement, the extent and adequacy of repairs and improvements, the vacancy rate, management and operating costs, and expected inflation of costs and rent.
The discounted cash flow approach discounts future projected cash flows to arrive at a present value of the property. Typically, the analysis involves projections of annual operating cash flows for a finite number of periods and a resale or reversion value at the end of that total period. The projected resale value is often estimated using a direct capitalization approach.

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