Commercial Investment Real Estate September/October 2013 - Page 43

As shown in Table 3, with the application of the Akerson
formula, a cap rate of 6.86% is derived.
The Difference
T e Akerson formula results in a rate that is at least 75 basis
points higher than the rate derived by the Gettel formula.
T e higher Akerson rate is attributed to the investment from
a perspective of an individual investor, whereas the Gettel
formula focuses on the investment from the perspective of
a bank lending committee. T e Gettel formula is account-
ing for debt coverage and principal pay-down whereas the
Akerson formula accounts for these items as well as equity
buildup. Simply put, the contingencies for equity account
for roughly 86 basis points of additional risk premium in the
Akerson application. In terms of value on the $7,000 NOI, the
Gettel formula produces a value of $115,908 and the Akerson
formula produces a value of $101,996. Of course both are of
nominal dif erence, yet one is a value to a loan committee
based on the property’s ability to pay and the other is a price
that buyer would be willing to spend, given these investment
criteria.
Which formula is correct? T e universal answer is, “It
depends.” Of course the results are merely 12 percent apart,
but in reality, perhaps both answers are correct. Recall that
an appraisal of market value as def ned by the Uniform
Standards of Professional Appraisal Practice is such only
to the intended user. T us, if your client is a potential buyer,
she may provide you with her equity hurdles in addition to
costs of debt. Either way, you now have several tools at your
disposal, in addition to any sale comparables you analyze,
to provide your client or the intended user with credible,
quality results founded in generally acceptable appraisal
standards.
In lieu of a for-sale sign, an appraisal is the only evidence
of market value accepted by third parties in the United
States. Valuation is an orderly science and an appraisal is
written in conformity with the commonly applied practices
and principles of real estate appraisers. Yet like their broker
brethren, even appraisers were perplexed when clients asked
“How much?” over the past few years. T ere simply were
insuf cient data points to suggest a relevant market.
Yet to those armed with CCIM’s CI 101 and CI 103 smarts,
the capitalization of income in response to a dearth of data
was a natural default. So long as there is leverage, income-
producing real estate will be valuable. So long as we continue
our studies of investor hurdle rates, both from the perspec-
tive of the lender and investor, we’ll have a means of convert-
ing stable income streams into value.
Eric B. Garfi eld, CCIM, MAI, is the director of the tangible asset
valuation practice at WTAS LLC in Los Angeles. Contact him at
eric.garfi [e-mail].
CCIM.com
Table 3: Akerson Formula
Calculation
Akerson Format Steps
Assumptions Stated on Left
1
M x Rm + E x Re 3 – M x P 4 = r 5 +/– Dep/(Gain) x 1/Sn 6 = Ro 0.75 x 0.0644 = 0.0483
= 0.0300
= –0.0080
= 0.0703
= –0.0017
2
1
2 + 0.25 x 0.1200
3 – 0.75 x 0.1866
4 = r 5 +/– 0.03 6 =
x
x
1/Sn
x
0.0570
0.0570
0.0686
Cap Rate
6.86%
Assumptions
M 75% Loan to Value Ratio
E 25% Equity to Value Ratio (Down Payment)
Years 30 Amortization Period (monthly payments)
Due 10 Loan to be called
1% 5% Loan Interest Rate
Re 12% Market Derived Return on Equity
Gain 3% Market Projected Increase in Value
PV $1 Present Value of Loan for purposes of calculation
FV $1 Future Value of Item to be reserved (For 1/Sn)
Calculations
Rm 0.064 Mortgage Constant
1/Sn 0.057 Sinking Fund Factor
AMH 0.127 Amortization Rate of Holding Period
P 0.187 Percentage Paid Off (In Decimals)
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